Celsius used investor funds for high-risk trades triggering liquidity issues

The Celsius Network recently suffered from a liquidity crisis that forced the crypto lender to halt withdrawals, swaps, and transfers. Amid reports that the company is considering filing for bankruptcy, new details show that the lender was involved in risky leveraged crypto trading techniques.

Celsius used client funds for high-risk investments

A report from Arkham Intelligence said that the Celsius Network failed to hedge against risks resulting in losses. One of the bad investment choices that Celsius is believed to have made was working with investment firm KeyFi, whose CEO recently resigned after being associated with the 0xb1 yield farming account.

The Arkham research noted that assets belonging to 0xb1 were part of Celsius’ liabilities to its clients. The yield farming protocol obtained $534 million worth of digital assets from Celsius between August 2020 and April 2021.

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The blockchain analytics firm further added that Celsius and 0xb1 had made 220 transactions in batch sizes of between $10 and $28 million. These funds were later used by 0xb1 to invest in yield farming projects like supplying liquidity to decentralized exchanges (DEXs) and DeFi protocols such as AAVE and Compound. 0xb1 even purchased non-fungible tokens valued at $6.3 million.

Data provided by analytics firms shows that Celsius transferred a large amount of funds to 0xb1. An audit by Chainalysis in December 2020 showed that Celsius had $3.31B in assets under management. At the time of the audit, Celsius sent $365 million to 0xb1, over 10% of the entire Celsius AUM, in December 2020.

The report further stated that Celsius operated on a business model where it held on to the difference between returns and the interest paid to users. Therefore, while users could view their rewards on their account dashboard, these rewards did not actually exist. By working with 0xvb1, Celsius ran out of customer funds and could not repay the earned interest.

KeyFi former CEO sues Celsius

The fiasco between Celsius and 0xb1 is still unfolding. Jason Stone recently alleged that Celsius used customer funds to manipulate the prices of the CEL token. Stone also alleged that Celsius was operating a Ponzi scheme, and the failure to facilitate withdrawals proved that the platform was a Ponzi.

Stone said that the 0xb1 address was created in August last year to allow Celsius to send customer deposits to KeyFi, where they could be managed and invested.

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