It’s been more than seven months since cryptocurrency lender Celsius Network banned withdrawals, freezing billions of dollars in assets borrowed by consumers looking for double-digit interest rates. A new analysis reveals how difficult it will be for investors to recover their funds.
In a 689-page report issued early Tuesday morning, Jenner & Block bankruptcy examiner Shoba Pillay revealed the findings of her four-month inquiry into the causes of Celsius’ demise and the alleged lies that business leaders told consumers as the company approached bankruptcy.
The research discovered that Celsius leaders bragged about their company’s safety while worrying about dwindling cash. According to the investigation, the firm inflated its balance sheet by boosting the value of its own token, CEL. At the same time, corporate insiders such as then-CEO Alex Mashinsky cashed out millions of dollars in tokens. Even while Celsius informed clients that it could offer such high returns because it was making more money, the investigation revealed that Celsius was losing hundreds of millions of dollars on poor investments.
“Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect,” the audit stated.
Mashinsky and Celsius did not reply to calls for comment.
The examiner’s report could lay the groundwork for Celsius’ bankruptcy or for creditors to try to recover from Maszynski and other people or organizations to whom the firm had transferred money months before its collapse. For crypto investors, the report offers many harsh lessons.
First, while many US officials feel that crypto businesses should be subject to monitoring, investors in many crypto products are almost entirely reliant on the truth of the statements of the firms to whom they are donating money. That’s a tragedy waiting to happen.
Before its downfall, Celsius, for example, constantly told clients that it returned 80% of its loan earnings to investors as a return on its capital. According to the examiner’s findings, this was a lie since staff claimed that rates were motivated by marketing considerations.
Mashinsky and other workers made claims about the company’s health during frequent “Ask me anything” live streams, and the company’s risk team supplied extensive lists of mistakes that they requested be edited out of the videos. Mashinsky maintained that Celsius was healthy until it froze withdrawals.
Second, clients wanting to recover money from Celsius’ bankruptcy may have to wait a little longer.
On Monday, bankrupt hedge fund Alameda Research sued Voyager Digital, another cryptocurrency lender once a competitor of Celsius, seeking a refund of the $445.8 million that Alameda paid to Voyager. The suit argues that Alameda was already essentially insolvent when the payments were made to Voyager and that the Alameda estate should get that money back to divide among all creditors, not just Voyager, which is currently in its own bankruptcy proceedings.
According to bankruptcy lawyers, as independent experts and creditor investigators sort out the events leading up to the bankruptcy of Celsius, Voyager, Alameda, and other cryptocurrency companies, similar claims for refunds are likely.
In many cases, courts allow bankrupt firms to recover funds used to repay loans months before the bankruptcy or even longer, depending on when the firm was declared insolvent. Because other firms, such as Alameda, analyze their repaid loans and the interconnectedness of the crypto ecosystem, it can take time for bankrupts to figure out what funds are available to them to repay creditors.
Even when token values begin to rebound, it may be months before the full extent of the so-called crypto winter is realized.