Cryptocurrency lender Celsius is a ‘scam’ and ‘Ponzi scheme’, lawsuit alleges

Celsius was sued Thursday by former investment manager Jason Stone as pressure continues to mount on the firm amid falling cryptocurrency prices. Stone claimed, among other things, that Celsius CEO Alex Mashinsky (above) “was able to get rich considerably”.

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Cryptocurrency lender Celsius artificially inflated the price of its own digital coin, failed to hedge risks and engaged in activities amounting to fraud, the lawsuit alleges.

Celsius was sued Thursday by former investment manager Jason Stone as pressure continues to mount on the firm amid cryptocurrency price collapse.

The lawsuit is filed after Celsius, which offers customers interest for depositing their cryptocurrency. was forced to suspend withdrawals for its users as it faces a liquidity crunch.

Celsius was not immediately available for comment on the lawsuit when contacted by CNBC.

Stone’s relationship with Celsius

Celsius acts like a bank, offering clients returns sometimes as high as 19% if they deposit their cryptocurrency with the company. Celsius then lends this cryptocurrency to others who are willing to pay high interest on the loan. He then tries to embezzle that money in order to return the income to customers.

Stone founded a company called KeyFi, which specialized in cryptocurrency trading strategies. Celsius and KeyFi entered into a “handshake deal” under which the latter firm will “manage billions of dollars of crypto-currency deposits from customers in exchange for a share of the profits generated from those crypto-currency deposits,” the lawsuit says.

The lawsuit states that “there was no formal written agreement between the parties.”

As of August 2020, Celsius began “transferring hundreds of millions of dollars in crypto assets” to Stone and his team, according to the lawsuit. Celsius has created a wallet on the Ethereum blockchain called “0xb1”. That’s where the company shipped the assets that Stone was supposed to deploy, the lawsuit says.

What does the claim claim?

Stone makes a number of accusations against Celsius in the lawsuit.

The lawsuit alleges that Celsius and Stone decided to use crypto trading strategies that required an effective hedging strategy to manage risk and protect against price fluctuations in certain digital coins. He adds that Celsius had a full understanding of what kind of trading activity KeyFi was involved in.

Stone claims that Celsius executives “repeatedly assured” him that the company entered into the necessary hedging deals to ensure that fluctuations in the price of certain crypto assets would not materially and negatively impact the company or its ability to pay back depositors. Stone and his team relied on those performances, the lawsuit adds.

“But those promises were lies. Despite its repeated assurances, Celsius failed to implement basic risk management strategies to protect against price fluctuation risks that were inherent in many deployed investment strategies.

Stone claims that there have been “many incidents” in which “Celsius’s inability to keep basic records has put clients’ funds at risk.”

Another allegation concerns a digital coin called CEL. This is the native Celsius token. Celsius says that if users accept interest payments in the form of CEL, they can earn higher interest than those who don’t.

However, the lawsuit alleges that Celsius was involved in deals to artificially inflate the price of CEL.

“The purpose of this scheme was both fraudulent and illegal: Celsius encouraged customers to pay with CEL tokens by providing them with higher interest rates,” the lawsuit says. “Then, by purposefully and artificially inflating the price of the CEL token, Celsius was able to pay customers who chose to receive their interest payments in the form of the CEL token for even less of a crypto asset.”

Stone also claims that Celsius CEO Alex Mashinsky “was able to get rich a lot.”

Finally, Stone claims in the lawsuit that Celsius used a “Ponzi scheme”.

Due to the failure of Celsius to hedge against trading risks, it had “huge obligations” to depositors denominated in Ether, but did not maintain assets in the digital coin equal to those obligations, the lawsuit says.

As customers tried to withdraw deposits, Celsius was forced to buy more ether on the open market at high prices (around January 2021) and suffered heavy losses, the lawsuit says. Stone claims that Celsius then began offering double-digit interest rates to lure in new savers whose funds had been used to pay off previous savers and lenders.

“Thus, although Celsius continued to position itself as a transparent and well-capitalized business, in fact it turned into a financial pyramid,” the lawsuit says.

What happened to Stone?

Stone left Celsius in March 2021. In the lawsuit, he alleges that at the time of his departure, Celsius had a $100 million to $200 million hole in its balance sheet that “he could not fully explain or fix.”

He claims that Celsius retains control of the “0xb1” ethereum wallet and that the Celsius CEO is using it “for his own personal gain.”

In one instance, Stone claims, Mashinsky transferred valuable non-fungible tokens or NFTs from accounts into his wife’s wallet.