Celsius Network is in big trouble.
The crypto lender is one of the biggest victims of the fall in cryptocurrency prices that caused a liquidity crisis in the industry in May, June and July.
The firm has filed for Chapter 11 bankruptcy and is restructuring its debt. But the platform, which traded cryptocurrencies and offered financial services like a traditional bank, is under pressure from retail investors who want to recoup some of their money. These investors are organizing on social media and their goal is to push the U.S Securities and Exchange Commission or/and the Federal Trade Commission (FTC), which is supposed to protect consumers, to open investigations into Celsius.
The company has just given them a new element to convince the two regulators. Indeed, Celsius has just filed a counter complaint against money manager Jason Stone and his firm KeyFi to whom Celsius had entrusted assets to manage in 2020.
'They Also Were Thieves'
"This action arises from the defendants’ incompetence, deceit and conversion, and seeks to require defendants to turn over valuable property they stole from Celsius (and ultimately from the whole Celsius community), and to pay damages and restitution for the substantial injuries the defendants have caused through their flagrant breaches of duty," Celsius wrote in their lawsuit, which you can read here.
"Unfortunately, Defendants Stone and KeyFi, Stone’s majority-owned corporate vehicle, proved themselves incapable of deploying coins profitably, and appear to have lost thousands of Celsius coins through their gross mismanagement. But the Defendants were not just incompetent, they also were thieves," the lender argued.
Celsius continued:
"The defendants stole millions of dollars in coins from Celsius 'wallets' – blockchain addresses where coins and other digital assets can be stored – by transferring them to wallets that, upon information and belief, are controlled by the defendants."
The firm also claims that Stone and his company used its coins to buy "hundreds" of non-fungible tokens (NFTs) "and then stole the NFTs they acquired with Celsius’ coins by sending them to wallets that, upon information and belief, they own or control."
Ponzi Scheme
Celsius' complaint comes after an initial complaint from Stone. In the lawsuit filed in early July, Stone called Celsius a Ponzi scheme. He claimed that Celsius used client funds to manipulate the price of its native token Cel. Stone also claimed that Celsius lost a lot of money because it didn't hedge against the risks presented by its practices.
Celsius, founded in 2017, built up to more than $20 billion in assets in five years thanks to its promises: the firm promised 18% interest rates to customers who deposited their cryptocurrencies. This is a much higher pay rate than traditional savings accounts.
To critics who felt that this model was not sustainable over time, CEO and founder Alex Mashinsky insisted that it was possible. But according to Stone's complaint, the fluctuations in coin prices have completely disrupted Celsius and weakened its ability to meet its commitments to its depositors.
Celsius only took deposits in bitcoin and ether, the top two cryptocurrencies by market value. This means, according to Stone, that when the prices of these two coins rose faster than other tokens, the firm found itself owing more to its customers. This happened because Celsius included other coins in its client compensation model.
"Prior to plaintiff coming on board, defendants had no unified, organized, or overarching investment strategy other than lending out the consumer deposits they received. Instead, they were desperately seeking a potential investment that could earn them more than they owed to their depositors," Stone wrote in his complaint, which you can read here.
"Otherwise, they would have to use additional deposits to pay the interest owed on prior deposits, a classic 'Ponzi scheme'."
Stone also claimed Celsius owed him hundreds of millions of dollars in compensation. He explained that his firm had brought Celsius $800 million by investing in decentralized finance (DeFi) projects. The agreement with the crypto lender provided for him to receive 20% of the $800 million, which did not happen, according to Stone.
