It appears that the problems at Celsius had been simmering for years before the crypto lender filed for bankruptcy.
The crypto company has experienced a host of internal bugs that led to the recent unrest, according to former employees and internal documents reviewed by CNBC. Many employees painted a picture of the risk, chaos, and alleged market manipulation.
“The biggest problem was the failure of risk management,” Timothy Cradle, former director of financial crimes compliance at Celsius, told CNBC in an interview. “I think Celsius had a good idea, they were doing a service that people really needed, but they weren’t managing the risks very well.”
The New Jersey-based Hoboken made headlines a month ago after it froze customer accounts, blaming it on “harsh market conditions.” It had 1.7 million clients in deposits of $11.8 billion as of June. Celsius clients told CNBC that they were drawn to the 17% return the company was offering on crypto deposits.
Behind the scenes, Celsius was loaning this money to hedge funds and others willing to pay a higher return. It will also invest in other high-risk crypto projects, according to the internal documents. Celsius later split those profits with the client. The model collapsed along with the price of cryptocurrencies, causing several companies to freeze assets and at least three companies to go into bankruptcy.
Cradle said he was part of the three-person compliance team between 2019 and 2021. The role required him to apply international financing laws to Celsius’ business. But he said resources were limited.
“The compliance team was very small,” Cradle said. “Compliance was a cost center – we were basically swallowing money and not giving anything back. They didn’t want to spend on compliance.”
An internal company document obtained by CNBC reiterated this claim. When it comes to evaluating fraudulent cryptocurrency platforms, she said, “There is not enough compliance staff for the number of users on the Celsius platform as there are only 3 full-time personnel.”
Banks are not your friend.
Cradle said he was particularly disturbed by conversations at the centenary birthday party in 2019 about a cryptocurrency created and used by Celsius, called a “sell” token. The executives said they were “injecting the token” and “actively trading and increasing the price of the token,” Cradle said.
“They weren’t shy about it,” Cradle said. “They were absolutely trading the token to manipulate the price.” “He came up in two completely different conversations for two completely different reasons.”
Celsius, CEO Alex Mashinsky, and the company’s attorneys did not respond to multiple requests for comment.
Celsius was sued on Thursday by former investment director Jason Stone, with pressure on the company continuing amid the collapse in cryptocurrency prices. Stone claimed, among other things, that Celsius CEO Alex Mashinsky (above) was “able to enrich himself significantly.”
Piaras Ó Mídheach | Sportsfile for the web summit | Getty Images
Celsius was by far the largest bearer of cel tokens. But it was also a buyer, according to blockchain data firm Arkham. The company estimates that Celsius has spent $350 million acquiring tokens on exchanges over the past three years, despite having billions of billions in its own vault. At the same time, senior executives were selling. Accounts linked to Alex Mashinsky appear to have sold or “swapped” nearly $40 million, according to Arkham.
Cradle and the other employees received a portion of their salary in the form of TB. It’s a way to attract and retain talent, a former HR employee said. It also allowed them to share in the company’s financial rise — similar to the allure of shares in a fast-growing startup. The coin started to rise in early 2020, and the following year it reached a high of about $8. It was trading at less than $1 as of July.
The CEO of Celsius has been an outspoken supporter of the token. He provided weekly YouTube updates often touting the benefits of the project or its “tokens”. Mashinsky was also known to be critical of Wall Street banks. He often wore a black T-shirt during public appearances that read: “Banks are not your friends.”
Another former Celsius employee, who asked not to be named, said that while Mashinsky was urging regular investors to buy cryptocurrency, he was selling behind the scenes.
The former employee said it wouldn’t take much to move the token price because the volume was relatively small. Mashinsky was selling millions behind closed doors without any public disclosures, according to the former employee.
“The price of TB is easy to manipulate because of the low volumes of TB. I’m sure [Mashinsky] “He knows it,” said the former employee. “This is just an example of what he would do to publicly manipulate the price for his own benefit.”
The allegations of the former employee echoed recently A lawsuit filed by former investment manager, Jason Stone. Stone claims Celsius has artificially inflated the price of its own token and has been “actively using client funds to manipulate the crypto-asset markets in their favour.” The lawsuit also alleged that Celsius failed to hedge the risk and engaged in activities that amounted to fraud.
Details inside the internal documents
Other internal documents highlight some of the risks Celsius appears to be taking with client money. Lenders such as Celsius and hedge funds were able to generate high returns by investing in “decentralized finance” or DeFi projects. Celsius has its own cryptocurrency and is counting on high returns to attract more borrowers. According to internal documents, Celsius has been investing client money in several DeFi projects. They are all rated as medium to high risk.
On Wednesday, Vermont became the sixth regulator in the state to launch a CSI investigation, and it indicated this investment strategy. The state’s Department of Financial Regulation said Celsius had “disseminated client assets into a variety of risky and illiquid investment, trading and lending activities.”
“Celesius’ clients have not received significant disclosures about their financial conditions, investment activities, risk factors and ability to pay their obligations to depositors and other creditors,” the Vermont regulator said in a statement.
Cradle also said he saw evidence of the company trading client money without disclosing that it did so. Celsius’ CEO has said explicitly on Twitter that the company does not trade customer money.
Cradle said that based on his first-hand experience with the company’s risk appetite, he wouldn’t hold his own money with a percentage score.
Internal documents also show evidence of disorganization across multiple teams. A document shows policies written by a team without the knowledge of that team leader. In one case, a senior risk officer wrote that he was “surprised” by a document written by another overseas team.
“Maybe he was surprised that the document existed—that’s the way things were in Celsius,” said Cradle. “It’s the left hand that doesn’t know what the right hand is doing.” “It’s just another example of mismanagement or some kind of dirty management on the part of Celsius.”
One area where Cradle said Celsius lacks transparency is the number of its accounts. While Celsius reported 1.7 million users, Cradle said that number is exaggerated.
“Maybe the number is close to 300,000, because the volume of fake accounts was so huge and there was nothing the management team was willing to do to stop people from doing that,” he said.
In addition to this alleged inconsistency, Mashinsky’s own Twitter posts show a discrepancy between the messages he conveys to clients and what was happening behind the scenes.
yesterday Withdrawal Freezing, in response to a tweet questioning the company’s financial health, Mashinsky wrote, “Do you even know someone who has a problem with withdrawal from a percentile? Why is FUD posting misinformation,” referring to fear, uncertainty, and doubt. The next day, June 12, customers were no longer allowed to withdraw funds from their accounts.
Public records indicate that the percentile may have been in financial trouble long before then.
Data from the federal government shows Celsius obtained a $281,502 Paycheck Protection Program loan in April 2020. The federal government granted these loans to businesses that have been negatively affected by the COVID-19 pandemic.
“That surprised me a little bit, and I was curious to see if we were making a profit,” Cradle said.
The loan was waived by the federal government, which means that the percentile met the requirements necessary to avoid repayment.
The risk is also shown in the recruitment process in percentage terms. Nikki Goodstein, a former senior member of the HR team, said she was unaware of any background checks at the company when she joined in May 2021.
She told CNBC that executives specifically asked the chief human resources officer not to run a background check on Yaron Shalem, the incoming chief financial officer. In November 2021, Shalem was arrested in Israel and charged with money laundering in connection with his former company. Shalem did not respond to requests for comment.
CNBC has also tried to find out the status of the case, but it does not appear to be publicly available in the Israeli court system. The chief human resources officer who Goodstein said had been told not to conduct a background check did not respond to CNBC’s request for comment.
Goodstein, who worked for publicly traded Fortune 500 companies before C, said she was surprised that someone in an executive position would not face a security screening.
“It was definitely a gap in the process at the time,” she said. “Everyone was [upset] That he hadn’t had his background checked, because then he wouldn’t have made such an embarrassment to the company if this was an operation that we did – we were all like, what just happened? “
Cradle said he has no plans to return to the cryptocurrency industry after Celsius and take up a stint at another startup. He said that the percentile is starting to make a good product at a time when banks are paying near-zero interest on savings.
“I think it was good people with bad planning — they didn’t hire at the right times, they didn’t work at the right times, they didn’t develop as the company grew,” he said. “It was just a bunch of mistakes that end very tragically.”
Erica Carnevali and Margaret Fleming contributed to this article.