Celsius was ‘insolvent since inception,’ examiner says in report

By Sarah Lizee

Olympia, Wash., Feb. 1 – The examiner appointed to Celsius Network LLC’s Chapter 11 case filed a final report on Tuesday with the U.S. Bankruptcy Court for the Southern District of New York following her investigation of the company’s conduct and cryptocurrency holdings both before and after it filed bankruptcy.

Shoba Pillay of Jenner & Block LLP, who had been appointed by the court in November, said in a lengthy 476-page report that the company was “insolvent since inception,” based on her findings.

“The business model Celsius advertised and sold to its customers was not the business that Celsius actually operated,” Pillay said.

Celsius had said that its primary financial product, its “earn” program, was the “safest place” for crypto. Customers who participated in the program transferred their crypto assets to Celsius in exchange for interest. In turn, Celsius deployed its customers’ crypto assets, through further loans, investments, or on exchanges, to generate income.

Pillay said Celsius’ co-founder and majority owner, Alex Mashinsky, repeatedly told customers that customer-deposited coins “are your coins, not our coins,” and when asked what would happen in the event of bankruptcy, he said “coins are returned to their owners even in the case of bankruptcy.”

On Jan. 4, the court ruled that the cryptocurrency assets remaining in earn accounts on the company’s petition date are property of the debtor’s estate.

At the petition date, Celsius had about 600,000 accounts in its earn program. The accounts held crypto assets with a market value of about $4.2 billion as of July 10, 2022.

The company had also advertised that it knew how to generate high returns with low risk by doing “what Celsius does best,” carefully vetting its financial counterparties and ensuring that when those counterparties borrowed crypto assets from Celsius, they pledged “over 100% collateral” to secure their loans, Pillay said.

Celsius told customers it would pay them at least 5% annual interest and that their rewards would equal each customer’s share of up to 80% of Celsius’ revenues.

Another cornerstone of Celsius’s marketing strategy was its promotion of its native CEL token, the examiner said.

Celsius told its customers that CEL was its “backbone,” equating the value of CEL with Celsius’ value.

The company said it planned to raise the initial capital to fund its business by selling 325 million CEL through private pre-sales and an initial coin offering, and that these sales would raise $50 million.

Celsius told customers that they would receive rewards in CEL that Celsius would obtain from its internal treasury, which would hold an additional 325 million CEL, or by buying CEL in the secondary market.

According to Celsius, this process would create a self-sustaining “flywheel.”

“From its inception, however, Celsius and the driving force behind its operations, Mr. Mashinsky, did not deliver on these promises,” Pillay said.

“Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect.”

The Hoboken, N.J.-based cryptocurrency lending platform filed bankruptcy on July 13, 2022 under Chapter 11 case number 22-10964.

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