Crypto on the decline (photo by vecteezy)
Just less than two weeks ago, the Israeli crypto lending platform Celsius (Celsius Network) filed for bankruptcy, at the end of a long business saga that was widely reported in the economic newspapers and crypto sections. Among other things, the collapse of the company is a consequence of the collapse of cryptocurrency prices and the collapse of the TerraUSD currency during the month of May, and the drop in crypto loans that have fallen as a result in recent months.
Since the announcement of Celsius’s bankruptcy proceedings, the court handling the company’s request for protection from creditors (Chapter 11) has been flooded with letters from small customers, which give a picture and a glimpse of the mechanisms through which hundreds of thousands invested their savings on the platform. The Calcalist website brings some of the stories of those small customers, who are not skilled and sophisticated investors, and who do not have a broad financial background and deep pockets to invest in the platform as fun or a gamble. Before the collapse, the heads of the Celsius company made a great effort to convince these investors that the company was regulated and safe, a healthy alternative to the established banks, the banking of the future that would bring them great returns.
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Celsius was established in 2017 by Alex Meshinsky (who served as CEO) and Daniel Leon. Over the years, the company offered three types of accounts: “Earn”, “Custody” and Borrow. “Borrow” status. The users (about 300 thousand) received the return in the same token that was deposited or through the company’s currency called CEL. Many of the investors were attracted to invest in this program through inflated rates of return (up to 18%) delivered weekly. Lawsuits filed against the company in the United States caused it to stop selling this product to American customers and instead Custody accounts were offered there, where the coins were indeed stored.
Since the company was founded about 5 years ago, many users have joined Celsius services believing the company’s promises that their cryptocurrency investments are safe. The company created a presentation according to which its people know how to successfully and efficiently manage the funds of the crypto market. Although there is probably no suspicion that the heads of the company intended to defraud their customers in the manner of Bernie Madoff; Perhaps it was the upheavals in the crypto market, or the company’s rash management decisions, and suddenly, in a puzzling move that was widely reported, last month (June 12 of this year) the company suspended all customer withdrawals, exchanges and transfers, and as mentioned about a month later filed for bankruptcy in court In New York.
Calcalist quotes from investors who fear that their money will go down the drain. Many of them describe how they connected every week to Mashinsky’s live update broadcasts for investors (a common practice in crypto investment companies), where he repeated and explained that the company is loyal to the rules of regulation, and even happily invites additional regulation to establish its position in the market. He said that Celsius is a safe alternative to traditional banking and that the funds can be withdrawn easily and at any time, and without any problems. In these broadcasts, many clients told Mashinsky that they had invested their life savings, some of them their pension money, in his company.
For example, a customer named Florrie Ohm writes to the court: “I am a single mother of two daughters who are starting college next year… I have supported my parents and my daughters on my own all my life. I have seen an advertisement and sales promotion for Celsius through the media… My cryptocurrencies in Celsius They may not be a lot of money for Mr Mashinsky and his highly paid staff, but it is a huge amount of money for my poor family.”
Rebecca Gallagher writes: “I am writing to you today as one of the thousands of unsecured creditors in the Celsius case who listened to Alex Mashinsky’s promises and transferred their entire pension and life savings to Celsius…. I did so because I was made to believe that it was a safe alternative to a bank savings account. Alex Mashinsky told us, that while the banks charge customers up to 29.9% interest on credit card debt using the customer’s money and keep it all for themselves, with Celsius we share the interest with you and eliminate the risk… Alex proudly told us that in the history of the company, no one has lost the loan. He He stated that he was there for the little man.”
Jonathan Robroker said: “The amount of crypto I deposited with these criminals represents a huge portion of all my savings. Some of this crypto was purchased with money I earned from a 20-year bond that I purchased monthly while serving as a rifleman in the US Army Marine Corps from which I was honorably discharged.. It took me a lifetime to raise the funds I invested.” Robroker continues to explain why and how he was convinced to invest in the platform: “Celsius CEO Alex Mashinsky, together with a clique of officers in his company, engaged in a fraud campaign against depositors like me. We were assured – on video – during the AMA sessions (ask me anything) that all our funds on Celsius are ours, safe, withdrawable at any time, and working hard to generate interest for us.”
Another small investor, Bruno Fernandez from Brazil, wrote: “I have 0.1 Bitcoin. I know this can be considered a small amount compared to other users, but for me it is a significant amount.”
At the end of last week, the first court hearing was held. Celsius’s lawyers argued that there was nothing in the company’s actions that led it to the situation it is in – whether it is in its investment strategies or risk management. They present things in such a way that it appears that the company fell victim to an external coincidence: as mentioned, the collapse of the Terra Luna project last May (including false rumors according to them that are related to Celsius’ share in the collapse), as well as fear in the market of exposing the company to risk factors that the crypto exchange Coinbase revealed at the same time. According to the lawyers’ version, all these factors combined and led to a run on the bank that crashed a company that had been well managed until then.
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Of course, there is no consensus regarding the sequence of events described. In recent weeks, former company employees, including a former finance director of the company in a lawsuit he filed against it, claimed that Bezelezius used to make risky and unhedged investments, and lost a lot of money as a result. In the documents submitted to the court, the sequence of these failures is referred to as “unexpected losses”, including $50 million in the BadgerDAO project that was hacked, collateral that the company was unable to repay on a loan it took from a “private lending platform” and $100 million in collateral that was eliminated following a loan the company took from an early investment In the Tatar company. In addition, the company used to pay old customers a return through new customer deposits. One lawsuit described Celsius’ business model as a “Ponzi scheme.”
The future of small investors is currently unclear. At the initial hearing in court, the defense attorneys explained that there will be no bankruptcy and liquidation and that the company has a recovery plan: crypto mining. Celsius is interested in continuing to mine Bitcoin through the company’s mining activity, and to increase its Bitcoin holdings. The company is asking the court to assess that the mining business will continue to be profitable, so that it can slowly return all of its customers to their lost assets. The judge who oversaw the proceedings approved the company to invest $3.7 million to build a new bitcoin mining facility and another $1.5 million in customs payments for importing bitcoin mining rigs.
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