Celsius accused of running “Ponzi Scheme” by Former Employee

Key Takeaways

  • The complaint was filed by KeyFi Inc., a company founded by the Celsius’s former investment manager, Jason Stone.
  • Stone accuses Celsius of running a Ponzi scheme to benefit itself through “gross mismanagement of customer deposits”.
  • The filing states that Celsius defrauded the plaintiff KeyFi Inc, into providing services worth millions of dollars and refused to pay for them.

Leading crypto lender Celsius Network faces allegations of using customer deposits to rig the price of its own crypto token(CEL) and for losing hundreds of millions of dollars by failing to hedge risk properly. The accusations come in the backdrop of Celsius suspending withdrawals and transfers for its 1.7 million customers, citing “extreme” market conditions.

The complaint was filed Thursday in New York State Court by KeyFi Inc., a company founded by the Celsius’s former investment manager, Jason Stone. Stone alleges that Celsius amassed offered over $20 billion in assets by offering interest rates as high as 18% to customers who deposited their cryptocurrencies. 

“Founder Alex Mashinsky dismissed skepticism about whether that was sustainable, saying the company was able to earn high rates itself,” the suit states. According to the complaint, Celsius allegedly was struggling to cover the payouts and suffered “severe exchange rate losses” owing to the fluctuating values of different coins.

Stone further accuses Celsius of running a Ponzi scheme to benefit itself through “gross mismanagement of customer deposits”. “Celsius began to offer double-digit interest rates to lure new depositors, whose funds were used to repay earlier depositors. Thus, while Celsius continued to market itself as a transparent and well capitalized business, in reality it had become a Ponzi Scheme”, said Stone during the court pleading.

The filing states that Celsius defrauded the plaintiff KeyFi Inc, into providing services worth millions of dollars and refusing to pay for them. Further, Stone accuses the crypto lender of leveraging customer deposits to manipulate crypto-asset markets and for failing to institute basic accounting controls which endangered customer deposits.

This was in reference to Celsius deciding to freeze withdrawals on June 13 putting 1.7 million customer’s money at stake. The platform is yet to resume all the suspended operations. Stone in his complaints points out to Celsius’s failure to implement basic risk management strategies to protect against the risks of price fluctuation that were inherent in many of the deployed investment strategies.

Oxb1 Allegations against Celsius

On Thursday, amidst all the media buzz regarding the serious allegations against Celsius , a person claiming to be Stone revealed himself to be the leader of the group of pseudonymous DeFi traders behind the Oxb1 address. Oxb1 is a pseudonym created from the first four letters and numbers of the person’s Ethereum wallet address. He took to twitter to provide a rundown of Celsius’ alleged dealings with KeyFi since 2020.

According to the tweet, Celsius partnered with KeyFi in mid-2020, which saw the creation of the Oxb1 address for KeyFi to manage, receive and invest customer deposits from Celsius. The assets under management totaled around $2 billion by the end of their partnership in March 2021, the tweet reads.

The twitter account also stated that Celsius’ risk management team, who monitored the activity of Oxb1, assured KeyFi that they were adequately hedging any potential impermanent loss (IL) and fluctuations in token prices relating to KeyFi investment activities. The tweet further adds that they terminated the partnership with Celsius in March 2021 after dsicovering the crypto lender has not been hedging KeyFi’s activities nor the fluctuations in crypto asset prices.

Oxb1 stated that he filed the lawsuit and took the matter public after a year of trying to privately settle the dispute with Celsius.  According to the account, Celsius owes KeyFi a significant amount of money and has refused to acknowledge its lack of risk management and honor the initial profit-sharing terms of the deal.

The serious fraud accusations come amid Celsius paying off its Bitcoin loan entirely. The repayment was viewed widely as a liquidity boost and a way to regain lost customer confidence. With this recent law suit, Celsius might have to do a little more than repaying its debt to win back the the lost reputation in crypto market.

Saniya Raahath
Saniya Raahath

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