A month ago, cryptobank Celsius, which accepted funds at 18% per annum, froze payments to depositors. According to the company’s representatives, the reason for this was the tightening of regulation by the US authorities. However, many users suspect that there is something else behind it – after all, such a high rate of return could hardly be possible without illegal schemes. What will happen to those who have deposited their money in this bank? Will they ever see it again?
So what happened?
Celsius Network has joined a solid list of digital companies that filed for bankruptcy after the cryptocurrency market collapsed. A Hoboken, New Jersey company applied to a New York court to activate chapter 11 of the Bankruptcy. Celsius filed for bankruptcy about a month after it froze a total of more than a million customer accounts worth billions of dollars.
The court filing says that the company’s budget deficit as of July 13 is $11.19 billion. The cryptobank has $167 million in cash to “provide liquidity sufficient to carry out certain transactions in the reorganization process.”
Celsius Network isn’t the only one going bankrupt after cryptomarket collapsed. QuadrigaCX, Canada’s largest cryptocurrency exchange, filed for creditor protection last year after its CEO died suddenly, taking with him the only password needed to access $190 million in Bitcoin and other digital assets stored in cold wallets. Another casualty is Mt. Gox, which was once the world’s largest Bitcoin exchange but had to file for bankruptcy in 2014 after losing 850,000 Bitcoins belonging to customers.
The bankruptcy, in Celsius’s opinion, will be “a chance to stabilize the firm and go through a reorganization process,” which should “maximize raise the value of the company and benefit all shareholders.”
Celsius Business Model
Celsius Network LLC took Bitcoin deposits from customers, loaned money to businesses, and made money off the spread between the interest rates. In addition to offering high interest rates, the organization promised investors a low danger of money loss. However, dangers have increased significantly recently despite a drop in demand in loans made in cryptocurrency.
With the promise of an 18% interest, Celsius attracted money from investors. It then invested that money in a variety of hazardous initiatives and projects, not just to “beat off” the expenses of deposits but also to make money on its own.
One such effort involved sending Stone and his KeyFi business hundreds of millions of dollars, which had mixed results. Liabilities of the bank were primarily in cryptocurrency, whilst investments were primarily in dollars and just minimally in cryptocurrency. The depositors had to return their money to the cryptobank in the same cryptocurrency they had originally used to deposit it, plus with interest, of course.
Therefore, there was a chance that he wouldn’t be able to acquire the original cryptocurrency to return to depositors if KeyFi handed him gains in dollars at the same time that it changed in value.
There is more
Another questionable scheme was Celsius’ own token, CEL, which Mashinsky and his associates excessively imposed on depositors and which played a significant role in their activities. The agreement to receive interest in branded tokens was one of the requirements for opening a deposit at 18 percent. Until the very end, when their pricing decreased from $8 to less than $1, Celsius insisted that its clients use CEL.
The Financial Times journalists were able to access the crypto bank’s paperwork, which reveal that the bankers were actively exploiting tokens as well. Only by selling them back to Celsius did they earn any money. The bank itself was CEL’s biggest owner and purchaser, and it was recorded on its balance sheet. To pay interest to depositors, he purchased millions of tokens on the open market each week.
According to the cryptoanalytic company Arkham Intelligence, Celsius has spent $350 million on such purchases since July 2019. However, while the cryptocurrency bank was busily purchasing tokens, its top executives were equally active in selling them. Leon sold $1.8 million worth of tokens back to the bank on the same day he published a video touting the promising future of cryptocurrency. He carried out identical deals 16 times between October 2020 and August 2021 for a total of $11.5 million.
Since October 2020, Celsius managers have sold back to themselves tokens totaling more over $40 million in value.
The creators of the crypto bank still own around 90% of their initial investments in tokens, according to Alex Mashinsky. It should also be stated right away that managers’ sales of their company’s tokens are not prohibited by law. These transactions reveal a lot about Celsius’s operations.
Mashinsky traded CEL as well. For instance, according to business records, he sold them in October 2020 for $500,000.
The former employees of the cryptobank, however, have strong suspicions that he carried out the same operations through undocumented routes. According to a calculation made by Arkham using publicly accessible blockchain data, Alex allegedly sold SEL to himself for a total of $44 million.
It is still too early to say anything for sure. The cryptobank’s management is currently in talks with the US authorities, and it is possible that a compromise will be reached and the bank will be able to resume its operations. However, given the current situation, it is more likely that the depositors will lose their money.
If you have deposited your money in cryptobank Celsius, we recommend that you contact a qualified lawyer to discuss your options. You may be able to get your money back through a class action lawsuit or some other legal process. However, it is also possible that you will not be able to recover anything.