A new lawsuit alleges that crypto lender Celsius artificially inflated the price of its digital coin. The lawsuit also describes the company as a “Ponzi scheme” and claims that it failed to adequately manage risk and engaged in what amounted to fraud.
Lawsuit Filed Against Celsius
Former investment manager Jason Stone filed the lawsuit against Celsius on Thursday amid the ongoing crash in cryptocurrency prices, although Friday ushered in a small rally in some currencies. According to CNBC, Stone alleged in the lawsuit filed in New York State court that Celsius failed to hedge against risk in its dealings with him and his company, KeyFi.
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He filed the lawsuit after Celsius paused withdrawals by customers due to a liquidity crisis caused by the tumbling crypto prices. The crypto lender offers interest to customers who deposit their cryptocurrency on its platform by lending it to other customers willing to pay high interest rates on their loans.
Celsius behaves like a bank by offering yield that can range as high as 19% to customers who despite their cryptocurrency with it. Stone founded KeyFi, which specialized in crypto trading, and KeyFi cut a "handshake deal" with Celsius.
The Celsius lawsuit states that under the terms of the deal, KeyFi manages "billions of dollars in customer crypto-deposits in return for a share of the profits generated from those crypto-deposits." Starting in August 2020, Celsius transferred "hundreds of millions of dollars in crypto-assets" to Stone and his team, setting up its 0xb1 wallet on the Ethereum blockchain. According to the lawsuit, Celsius sent the assets Stone was to deploy to that wallet.
Accusations
According to the lawsuit, the crypto trading strategies Celsius and Stone engaged in required adequate hedging to manage risk and protect against volatility in the prices of certain digital currencies. It also states that Celsius had full view of the trading activities KeyFi engaged in.
Stone alleges that Celsius executives had "repeatedly assured" him that they had put adequate hedging transactions in place to protect against extreme price fluctuations in some cryptocurrencies. However, the lawsuit against Celsius states that those "promises were lies" and that Celsius "failed to implement basic risk management strategies to protect against the risks of price fluctuation that were inherent in many of the deployed investment strategies."
The lawsuit also alleged that there were "multiple incidents" in which Celsius "endangered customer funds." Additionally, it claims the company artificially inflated its digital coin CEL by paying customers higher interest rates if they chose to receive their payments in CEL tokens. Stone claims that the "purpose of this scheme was both fraudulent and illegal."
Ponzi scheme?
Stone also declared that Celsius was running a "Ponzi scheme." The lawsuit stated that Celsius had "massive liabilities" in ether but did not maintain enough holdings in that cryptocurrency to address those liabilities. As a result, when customers tried to withdraw their ether deposits, Celsius had to buy more on the open market at high prices, sustaining heavy losses.
According to the lawsuit, Celsius then started to offer double-digit interest rates to lure in new depositors whose funds were used to repay creditors and earlier depositors. Stone left Celsius in March 2021.
In the lawsuit, he claims the company had a $100 million to $200 million gap in its balance sheet that it couldn't explain or resolve. He also claims that Celsius' CEO uses the company's 0xb1 Ethereum wallet "for his own personal benefit."
