Is the ‘crypto-winter’ getting colder for Celsius?

A recent lawsuit against the cryptocurrency lending giant that opened a much-celebrated Tampa office last year alleges several trading improprieties as the company worked to generate returns of 18% on deposits.

Jason Stone, a former investment manager for the Celsius Network and founder of the crypto trading strategy firm KeyFi, filed the lawsuit in New York State July 7. Stone alleges that Celsius failed to hedge risks to customers, committed a series of actions equitable to fraud, disregarded risks and engaged in nonsensical trading practices.

The lawsuit states that prior to Stone joining Celsius, the company “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.”

“The recent revelation that Celsius does not have the assets on hand to meet its withdrawal obligations show that defendants were, in fact, operating a Ponzi scheme.”

On June 13, the lending firm announced it was pausing all withdrawals amid a liquidity crisis. Celsius had almost $12 billion in assets under management in May, down from over $20 billion earlier this year. A spokesperson for Celsius has not responded to requests for comment.

According to the complaint, KeyFi and Celsius began a business relationship without a formal agreement in August 2020, instead engaging in an enterprise “for mutual benefit” and “based on respect and trust.” The company gave Stone its private cryptographic keys to access funds for investment through decentralized finance, or DeFi, protocols.

DeFi consists of an assemblage of apps that let users borrow, lend and trade with each other without middlemen – or the protections found in traditional banking. Many DeFi apps were paying huge rewards in proprietary coins at the time, and, according to the lawsuit, KeyFi earned Celsius over $800 million. Stone alleges that Celsius never paid him the 20% share of the returns he was supposed to receive.

Stone explained the crux of the problem is that Celsius mainly accepted customer deposits in bitcoin and ethereum. However, his DeFi strategies earned rewards in smaller – and even more volatile – proprietary altcoins.

If the price of bitcoin and ethereum increased faster than the other tokens, and with Celsius promising customers high returns, the company would owe significantly more money than it was earning on its investments.

Making matters worse was Celsius tracking customers’ deposits in U.S. dollars, even if they were owed Bitcoin or other digital currency. As the suit noted, the value of bitcoin and ether increased significantly throughout 2020 and 2021, while the dollar stayed stagnant. That led to hundreds of millions of dollars in liabilities that Celsius was unprepared to pay.

“When Jason Stone left Celsius, Celsius had a $100-$200 million hole on its balance sheet that it could not fully explain or resolve,” stated the court document. “Despite this balance sheet insolvency, Celsius continues to take on more customer assets, which means it continues to accrue considerable liabilities to the detriment of its current creditors.”

Despite the platform’s month-long pause on withdrawals and ongoing legal battles, Celsius has still encouraged customers to deposit their assets and hodl, a crypto insider acronym for “hold on for dear life.”

The suit further states that the lender amassed “massive liabilities” to depositors in ether without maintaining enough of the digital currency to fulfill obligations. As customers sought to withdraw ether deposits, Celsius “began to offer double-digit interest rates in order to lure new depositors and creditors.”

“Thus, while Celsius continued to market itself as a transparent and well-capitalized business, in reality, it had become a Ponzi scheme.”

Stone also claims that Celsius used customer assets to artificially inflate the price of its proprietary token, CEL. The platform raised $50 million in 2018 by selling the token, and Stone alleges that company leadership used $90 million in bitcoin deposits to buy CEL, increasing its price. He stated that Celsius then borrowed one billion Tether stablecoins to cover the hole in its balance sheet.

In a July 7 Twitter thread, Stone said he discovered Celsius lied to KeyFi in late February 2021. He added that he ended his relationship with the company in March 2021 but told the platform’s leadership he would continue working with them “to unwind our various positions over the following months.”

However, as Coindesk noted, Stone’s complaint followed a report from analytics firm Arkham Intelligence that challenged several elements of the lawsuit. According to Arkham’s analysis, Celsius would have generated better returns by simply holding customer deposits.

The report concluded the assets invested by KeyFi could have reached a value of $1.52 billion, or close to $400 million more than what Stone claimed to earn.

The author also noted the peculiarity of a trading firm operating solely on assurances that a company was appropriately tracking and hedging its activities, and suggested that KeyFi’s strategies appeared to fail in a slumping market.

For its part, Celsius continues to pay down its debt. Coindesk reported Wednesday that the embattled lender fully paid off the money it owes to DeFi lending protocol Compound, freeing up nearly $200 million in pledged collateral.

Since the beginning of July, Celsius has paid back $223 million to DeFi protocol Maker, $235 million to Aave and $258 million to Compound. As a result, the company has now reclaimed over $1 billion in crypto assets previously stuck in the protocols as collateral.

View the full lawsuit here.