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Former Employee Accuses Celsius of Running a Ponzi Scheme; Files Lawsuit Against the Platform

2 mins
Updated by Geraint Price
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In Brief

  • A former employee of crypto platform Celsius has brought in a lawsuit against the digital asset lender.
  • The company is accused of market manipulation, risk management failures, mismanagement, and accounting fraud.
  • The ex employee also equated Celsius to a 'classic Ponzi scheme' that offered unsustainable interest rates.
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A former employee of troubled crypto lender Celsius has launched a lawsuit accusing the company of market manipulation and risk management failures.

The development comes amid a credit crisis in the crypto market that led to the lender halting customer withdrawals in the past weeks to repay its debts.

Alleged market manipulation using customer funds

Jason Stone, the founder of KeyFi, alleges in the complaint that Celsius has been leveraging its customer deposits to manipulate the cryptocurrency markets. 

Stone says Celsius used customer bitcoin deposits to inflate its own crypto-asset called the Celsius token (CEL). CEL was first issued in March 2018. 

The lawsuit also claims: “Celsius paid a portion of interest on deposits in CEL tokens and a portion of interest in other crypto-assets such as bitcoin and ether… It then failed to mark-to-market those assets in its internal ledger as those crypto-assets appreciated, creating a substantial hole in its accounting.”

Consequently, it is alleged the company endangered cumulative customer deposits of around $20 billion by failing to institute basic accounting controls.

Celsius lacked adequate hedging

Stone said in a Twitter thread: “They assured me that as part of this monitoring, their trading teams were adequately hedging any potential impermanent loss from our activities in liquidity pools. They also assured me they had risk management and hedging in place to account for fluctuations in token prices.”

According to the complaint, Celsius was not hedging KeyFi’s trading activities or fluctuations in the crypto-asset prices. Which has now led to the platform refusing withdrawals to its customers. 

The lawsuit further claims: “The accounting error masked hundreds of millions of dollars in liabilities that Celsius was not prepared to pay out.”

A “classic Ponzi scheme”

In the lawsuit, Stone also went ahead to equate the company to a “classic Ponzi scheme” that offered unsustainably-high interest rates on deposits. 

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

Amid the dispute, the money managing platform also cites Celsius’ refusal to honor its contractual obligations to pay KeyFi millions of dollars under a 20% net profit-sharing agreement.

Celsius accused of building liability

Furthermore, Stone’s problem lies with the company continuing to take on more customer assets, despite the platform’s apparent balance sheet insolvency

The complaint says that this means Celsius “continues to accrue considerable liabilities to the detriment of its current creditor.”

Currently, Celsius is considering a financial restructuring plan and has reportedly hired experts from different disciplines to explore avenues.

Meanwhile, founder and CEO Alex Mashinsky has maintained a social media silence this month and had not reacted to the allegations by press time.  

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Shraddha Sharma
Shraddha is an India-based journalist who worked in business and financial news before diving into the crypto space. As an investment enthusiast, she has also has a keen interest in understanding crypto from a personal finance standpoint.