Bankrupt Crypto Lender Celsius: We Own Customers’ Funds

Celsius Network, bankruptcy, customer funds

Investors with funds trapped in failed crypto lender Celsius Network’s bankruptcy may find that their biggest problem is not with the court, but with the customer agreements they signed.

Specifically, those agreements say that funds deposited are Celsius’s property, rather than customers’.

“Celsius is not an asset manager, it’s a shadow bank,” said economist Frances Coppola, a frequent crypto commentator and columnist, in a blog post titled “Why Celsius Network’s depositors won’t get their money back.”

Coppola said, “Deposits in banks aren’t even ‘customer assets,’ let alone ‘assets under management.’ They are unsecured loans to the bank. They are thus liabilities of the bank and fully at risk in bankruptcy. Depositors in a bank do not have any legal right to return of their funds.”

Celsius is the biggest of several high-profile crypto lending insolvencies recently — a number that notably also includes BlockFi, which was bailed out and possibly purchased by Sam Bankman-Fried’s FTX, the largest U.S. cryptocurrency exchange, as well as Voyager Digital.

See also: Stablecoin Collapse Sent Voyager Digital and Celsius on Different Paths to Bankruptcy

Unlike other lenders that focused on institutional investors recklessly seeking to cash in on decentralized finance (DeFi) projects, Celsius bet heavily itself. It got caught out by the collapsing crypto market and, to a lesser extent, the $48 billion collapse of a stablecoin used as in instrument in some of those investments.

Internal Dissent

Celsius’s terms of use, Coppola said, made “completely clear that customers who deposit funds in Celsius’s interest-bearing accounts are lending their funds to Celsius to do with as it pleases. And it specifically says that in the event of bankruptcy, customers might not get all — or indeed any — of their money back.”

They are behind all secured and senior claims, including unpaid taxes. “This is why licensed banks have deposit insurance,” she said. “And this is also why, in 2008, government chose to recapitalize banks, including unlicensed shadow banks. If they hadn’t, millions of depositors would have lost some or all of their money.”

Timothy Cradle, Celsius’s former director of financial crimes compliance, said much the same thing in a CNBC interview on Tuesday (July 19).

Cradle, who told CNBC he “didn’t feel comfortable” leaving his own funds on the platform, said, “I frequently read the terms of use — once you deposit your assets with Celsius, they belong to Celsius, and Celsius can keep them if they need to or want to.”

Boiling Over

Celsius CEO Alex Mashinsky was known for frequently proclaiming that Celsius was far better than a bank — he’s been known to wear T-shirts saying “banks are not our friends” while speaking at crypto industry events.

Indeed, the interest rate, or yield, it paid customers was far better — 18%, as opposed to the sub-1% regulated and federally insured banks typically offer depositors. And much of the crypto lending industry has been accused of using the terminology of banks — in many cases, they were “depositing” funds rather than investing them, for example.

That is something the Vermont Department of Financial Regulation said last week, when it became the sixth state regulator to announce an investigation into Celsius.

The company, it said, “deployed customer assets in a variety of risky and illiquid investments, trading, and lending activities,” but did not provide them “critical disclosures about its financial condition, investing activities, risk factors, and ability to repay its obligations to depositors and other creditors.”

On Monday (July 18), attorneys for Celsius released a report to the U.S. Bankruptcy Court for Southern District of New York that showed it had $5.5 billion in liabilities and $4.3 billion in assets — including $600 million in its own Celsius (CEL) cryptocurrency. Given that CEL has tanked far enough that its market capitalization is just $190 million, that valuation is questionable, to say the least.

Growing Accusations

Cradle explained in detail how disorganized Celsius was, saying “the biggest issue was a failure of risk management.”

He told CNBC, “I think Celsius had a good idea, they were providing a service that people really needed, but they weren’t managing risk very well.”

At the same time, Cradle said that the company view compliance as “a cost center” that sucked money out without bringing anything in.

Others take a far dimmer view. Earlier this month, Jason Stone, a former investment manager who said he worked with Celsius, sued the company, saying that it committed fraud and was “a Ponzi scheme,” CNBC reported. Other employees accused Mashinsky of pumping the CEL token while selling his own.

Another problem Cradle alleged was that Celsius overstated its size dramatically. Its reported 1.7 million customers “was probably closer to 300,000, because the amount of fake accounts was so vast and there was nothing the management team was willing to do to really stop people from doing that,” he said.

Which is, in its way, a silver lining if true. There are far fewer victims who are likely to lose their shirts in bankruptcy.

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