BlocksInform
Joanna Ossinger
A court-appointed examiner blasted crypto lender Celsius Network Ltd and its former Chief Executive Officer Alex Mashinsky for lacking adequate risk management and misleading customers about its business practices and financial health.
Examiner Shoba Pillay said in her 689-page final report published Tuesday that Celsius — which let people earn yield on their coins by lending them out — lacked the ability to accurately track its assets and liabilities, and tried to erase misrepresentations made by Mashinsky in public statements.
The company continued to present an optimistic financial situation to its clients, even though it was facing a worsening of the May liquidity crisis, with staff describing the company in-house as a "sinking ship" without a plan, it says. The Commission also failed to disclose in a transparent manner information about the purchases of its token and used customer assets as collateral for loans to fill gaps in its balance sheet.
'Behind the scenes, Celsius conducted its business in a way that was distinctly different from how it marketed to its customers in all respects,' said the report.
The findings come as Celsius continues to inch its way through bankruptcy proceedings while investigations by state and federal regulators in the United States are ongoing. The company went bankrupt in July after a sharp drop in crypto prices exacerbated by the collapse of the terra blockchain led its risky bets to flip. The lender, with over 100,000 creditors, had interrupted withdrawals several weeks prior to declaring bankruptcy.
The reviewer was appointed in late September to review how Celsius was managing his affairs, including if different types of user accounts were being mixed.
In the report of Thursday, pillay noted how comments made by mashinsky in live weekly question-and-answer sessions with users — intended to present a rosier picture of celsius’s business — were monitored and in some instances edited by celsius employees after they had aired to remove inaccurate and misleading content.
Mashinsky repeated on several occasions to customers that the symbolic value of the enterprise reflected the value of the enterprise, despite internal conversations throughout 2022 in which employees said cel should be worth $0. celsius and its managers also told users that cryptoassets deposited with celsius were “your assets” that would be returned in the event of bankruptcy, In accordance with Celsius's terms of service, as of March 2020, all ownership rights were transferred to the company.
The last report examined the purchases of cel carried out by celsius itself, using the funds of the customers and the money collected from external investors. She found that the lender had spent at least $558 million to purchase his own chip, and that he had hidden from clients the extent to which he had been able to find work.
According to the report, celsius has often sought to protect it from the price cuts it attributed to the sale by Mashinsky of a large part of his personal assets. From 2018 to the time Celsius went bankrupt, mashinsky sold at least 25 million cel tokens — realizing at least $68.7 million on these sales — while co-founder s. daniel leon sold at least 2.6 million cel tokens for at least $9.74 million, it says.
Mashinsky, who quit Celsius in September, did not immediately respond to a request for comments.
Celsius also told clients that it provides high rates of return by investing their assets in institutional loans and loans to low-risk, fully guaranteed individuals. In reality, The company started making riskier investments to attract more customers during the market expansion period of 2020 and 2021, granting loans which were not fully guaranteed or which were not guaranteed in order to increase interest rates, the report states. According to the report, as of June 2021, it was standard practice for one-third of Celsius's institutional loan portfolio to be fully unsecured.
Faulty Accounting and Risk Management
Celsius’s own accounting systems hampered the examiner’s ability to analyze the business’s financial condition, the report said. The lender used a combination of spreadsheets and quickbooks and netsuite accounting systems to record their information.
The reviewer also found "material breaches of tax compliance" within a few degrees, given that he had hired no one to do the work until 2021 and that he did not put in place the systems needed to ensure that the tax was paid. The company's bitcoin mining operations have experienced similar problems, with 14 million dollars in outstanding utility bills and as much as 23 million dollars in taxes owed.
According to the report, Celsius had no risk management function or written risk policies until 2021 when they hired four people to form their first team. This new team has started to implement what have been called "interim" measures to allow time for more robust procedures to be implemented in 2022. Notwithstanding those changes, when a person has been engaged to implement internal audit procedures, the firm's management team delayed its proposals and "Celsius never fully implemented a sound risk management policy prior to declaring bankruptcy."
Pillay first filed a 302-page interim report in November, describing Celsius’s liquidity crunch and the shortfall of funds in the company’s Custody accounts. This report found the mix of certain accounts, and said Celsius launched its retention program "without adequate accounting and operational controls or technical infrastructure."
