Which Crypto Lender Spent $558 Million On Its Own Coin

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Celsius Network, co-founded by serial entrepreneur Alex Mashinsky, spent at least $558 million purchasing its own token, CEL. According to the latest filing, the cryptocurrency lender used to entice customers with the promise of “financial freedom,” calling itself a ‘community first” company selling products safer than a bank. Among the firm’s most catchy lines was “We are Celsius. We dream big.”

The failed crypto lender, which is in the middle of a bankruptcy process, is said to have reported up to $25 billion in assets under management. Notably, most of that sum was lent to other digital asset companies to satisfy a 5% annual return.

However, a court-appointed examiner, Shoba Pillay, made a different conclusion on Tuesday concerning what the failed lender did. Writing in a 700-page report, Pillay noted:

From its inception, however, Celsius and the driving force behind its operations, Mr. Mashinsky, did not deliver on these promises. ‘Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect.

The report also alleges that Celsius was involved in all questionable investment practices long linked with a traditional finance sector that crypto visionaries have been looking to eclipse. These include “Circular lending arrangements, token manipulation, misleading statements and false guarantees, and even the use of customer assets to pay liabilities of earlier clients.” In the words of Dean Tappen, Celsius Coin Deployment Specialist, these were “very Ponzi-like” behavior.

Key Findings From The Report

Want some updates on the #Celsius case?
👉Misrepresented the $50 million ICO, raised $32 million only
👉Spent $558 million+ buying its own token
👉Used customer's fund for $CEL buybacks
👉CEO dumped $68.7 million in CEL tokens on retail
👉Lost over $300 Million in bad investments

— ErmoFi (@ErmofiNews) February 1, 2023

Celsius Spent A Minimum Of $558 Million Buying Its Own Token

To begin with, the examiner’s report acknowledges that the Celsius token (CEL) had a rocky start. The company’s ICO happened in 2018 for the CEL token, with the lender disclosing that it sold 325 million CEL tokens. Reportedly, this was a false statement, with the report noting that between the ICO and private sales, Celsius only sold 203 million, which led it to amass a meager $32 million from the initial coin offering (ICO) instead of the expected $50 million. In this regard, the examiner says:

Despite its promises of transparency, Celsius debated internally whether to tell its community how the ICO actually turned out but decided not to do so because it feared its community would be upset.

The company also advertised the CEL token as its ‘backbone’ alongside repeated actions by CEO Mashinsky to equate the value of the CEL token with the company’s value. The examiner also added that Celsius employed the ‘flywheel’ strategy, privately selling CEL tokens, over-the-counter (OTC) transactions, and making offsetting purchases in the open market to impact trading prices. Cumulatively, the examiner notes that Celcius spent a minimum of $558 million buying its own token, adding:

From 2018 through the Petition Date, Celsius transferred at least 223 million CEL from the secondary market to its own wallets, a greater number than the total amount of CEL (203 million) released to the public in the ICO. In effect, Celsius bought every CEL token in the market at least one time and, in some instances, twice.

Ultimately, what was sold as Celsius’ ‘backbone’ broke on May 12, 2022, when the CEL price plummeted to $0.57, with former CEO Rod Bolger describing it as a “dead token,” according to the examiner.

Expensive One-Time Bets

The report highlights Celsius’ “tremendous growth” in customers and assets under management from its inception to its peak in November 2021, which coincides with the height of the crypto bull market. This was also when the crypto firm experienced some of its gravest losses. Pillay said that “while Celsius grew its assets under management, it was not profitable.”

Notably, as the lender began to provide higher reward rates relative to industry competitors, it made four huge bets that caused a total pre-tax loss of $800 million in 2021. In the end, the company lost $288 million from two loans taken out with institutional investment firm Equities First Holdings. The lender committed Bitcoin (BTC) and Ether (ETH) as collateral to the investment firm in 2019 and 2020. Unfortunately, Equities First could not return the collateral in 2021 after its value had increased significantly.

In the words of Pillay, “Equities First loans were necessary not only to fund Celsius’s operations but also to support the retail loans that Celsius extended to its customers (meaning that Celsius borrowed from Equities First and then loaned the proceeds to its customers).”

Notably, institutional loans were among Celsius’s primary revenue drivers, as the lender made unsecured loans to players like Anchorage, Flow Traders, Galaxy Digital, and an FTX subsidiary from July 2021 through to early 2022.

The report also reveals that 33.3% of Celsius’s institutional loan portfolio was unsecured, with over 50% under-collateralized by July 2021. The examiner also discovered that fully collateralized loans started increasing in 2021 and 2022. However, this was only due to the lender accepting collateral in FTT and SRM, the native token of FTX and the FTX-associated Serum tokens, respectively.

Celsius also lost $130 million attempting to play the Grayscale Bitcoin Trust (GBTC)arbitrage trade, where institutional investors would acquire newly issued GBTC shares at equivalent value from Genesis Global Trading before selling the same shares for a premium on the open market once a six-month lock-up period ended.

By February 2021, Celsius had $752 million invested in Grayscale assets with hopes to reap the rewards from a premium of more than 40%. Nevertheless, the premium flipped shortly after recording a discount before Celsius’s lock-up duration was over, causing significant losses. The lender’s losses were invigorated by failed business relationships with KeyFi, a decentralized finance (DeFi) management platform, and staking platform Stakehound.

A Double Down On Tether In Particular

Further, into the report, the examiner reveals that Celsius’s lending to the stablecoin Tether increased to more than $2 billion. The number went higher later in September 2021, so much so that Celsius’ Risk Committee was concerned that the lending was an “existential risk” as Celsius’ capital is inadequate to survive a Tether default.”

Reportedly, Celsius’s loans to Tether were double the lender’s credit limit, although other loans to firms now facing bankruptcy were also above Celsius’ supposed self-imposed limits. Among those who borrowed above the company’s credit limit were Alameda Research and Three Arrows Capital.

The examiner highlighted that additional loans to Amber Technologies, Dunamis Trading, Kenetic Trading, and Profluent Trading “were all more than their stated credit limits.” Topping it all up, Pillay alludes that Mashinsky stretched the truth even further relative to Celsius’ credit limits when the Celsius CEO told people that there were no unsecured loans. Despite such an assurance from a company executive, the lender’s unsecured lending bloated from 14% of Celsius’ institutional lending portfolio in December 2020 to one-third by June 2021.

Mashinsky Misled About Cashing Out

The court-appointed examiner also said that Mashinsky cashed out $68.7 million in CEL tokens between 2018 and last July amid “repeated assertions that he was not a seller of CEL.” Citing one example in Pillay’s report, the examiner points to November 2021, when Mashinsky addressed reports that he sold CEL tokens in recent weeks, noting that he had purchased 30,000 tokens. Although he had purchased 29,000 CEL tokens, he also sold 344,000 tokens in the previous month.

A portion of those sales was a part of the $558 million in purchases of CEL that Celsius itself performed, which alarmed senior executives. Tappen, who previously described the behavior as “Ponzi-like,” highlighted that customer assets were being used on CEL to raise the price “to get the valuations to be able to sell back to the company.”

The court-commissioned report features the company’s ex-CFO, who, in one instance, wrote, “[w]e are talking about becoming a regulated entity, and we are doing something possibly illegal and definitely not compliant.”

Celsius Has Tax Dues

The court-appointed examiner also discovered that there were no “dedicated tax professions for the first three years of Celsius’ existence.” Additionally, the lender’s crypto arm, Celsius Mining, owed $16.5 million in taxes as of the day of the petition, when Celsius filed for Chapter 11 bankruptcy protection and could owe more than $6 million more. In particular, the lender owes taxes across Georgia and Pennsylvania.

Pillay also established “troubling inconsistencies” between information and witness statements, noting that the firm’s lack of processes and general dis-coordination on tax caused Celsius Mining to owe significant use taxes for mining rigs deployed across 2022. The examiner also pointed out that she did not identify any facts to indicate that Celsius or its business arms “willfully or intentionally failed to pay its tax obligations.”