Examiner discovers "extremely Ponzi-like" money-using practices and customer manipulation at Celsius

On January 31, court-appointed examiner Shoba Pillay delivered her final report on a few parts of Celsius's activities. Without the 31 appendices, the document's 470 pages were ordered on September 29.

Pillay is a partner at the law firm Jenner & Block and a former federal prosecutor. She examined the way Celsius handled customer cryptocurrencies, the veracity of the company's statements made in public, whether fresh deposits were utilized to settle accounts with former clients, the state of the company's mining operation, and tax collection.

“Celsius promoted itself as an altruistic organization,” Pillay stated. Though, “Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect.”

Whenever the Celsius initial coin offering in March 2018 fell short of raising the anticipated $50 million, raising only $32 million instead, Pillay discovered that the deceit had already started. The absence was not disclosed to the Celsius community. Founder Alex Mashinsky did not keep his commitment to purchase any unregistered tokens either. Additionally, Pillay provided evidence of Mashinsky's personal and professional influence over the native CEL token's pricing. That endeavor fell short, in part because of accounting errors. The result is:

“Celsius did not earn sufficient yield on its crypto asset deployments to fully fund its CEL buybacks. As a result, it began using customer-deposited Bitcoin (BTC) and Ether (ETH) to fund its CEL purchases.”

Consumers began withdrawing more of the CEL cryptocurrency at the beginning of 2021 as Bitcoin and Ether costs rose. Celsius “justified its use of customer deposits to fill this hole in its balance sheet on the basis that it was not selling customer deposits but rather posting them as collateral to borrow the necessary coins,” according to the report.

Pillay reported that the Celsius coin distribution specialist had stated in internal correspondence that the acts were “extremely Ponzi-like.” Additionally, the company's incentive (interest) rates were not determined by the yield produced by account holders but rather were designed to outperform those of rivals. Prior to July 2021, there was no reward strategy in place.

The corporation distributed $1.36 billion more in prizes between 2018 and June 30, 2022, than it made from properties held by customers.

Celsius was no longer able to support the price of CEL when Terra's UST stablecoin collapsed in May of last year. It stopped taking withdrawals on June 13 but still giving out prizes. The corporation was acting inexplicably at the time. Pillay stated:

“Between June 9 and June 12, Celsius did directly use new customer deposits to fund customer withdrawal requests.”

The examiner discovered that, with a handful of exceptions, Celsius' mining firm, which was established as a subsidiary in October 2020, was “usually current” on its bills. She listed the unpaid obligation in full:

“Celsius Mining‘s unpaid utility-related bills were $13,982,152. Celsius Mining’s mining hosts, however, hold prepayment balances totaling $46,809,756 that may be available to offset Celsius Minings obligations.”

In October, Celsius stopped paying its obligation to independent mining contractor Core Scientific.

Less optimistic was the tax scenario. Pillay discovered “significant tax compliance deficiencies,” which may not come as a surprise given that Celsius did not have any tax experts on board until June 2021. Even then, there were no structures in place to ensure prompt payment of use taxes and value-added taxes.

Regarding how relevant taxes for Celsius Mining were determined or paid, Pillay revealed extensive misunderstanding. As a result, in the American states of Texas, Pennsylvania, and Georgia, where it operates mining activities, Celsius Mining may be hit with tax bills totaling more than $20 million. Exclusions that are applied retroactively may diminish that sum. The United Kingdom-based company Celsius Network may have to pay VAT. It has set aside $3.7 million to pay them.

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