Celsius Used New Customer Funds To Pay For Withdrawals (coindesk.com) 30
Celsius Network misled its investors -- and on occasion used new customer funds to pay for other customers' withdrawals, the usual definition of a Ponzi scheme, an independent examiner (PDF) for the U.S. bankruptcy court in New York said in a Tuesday filing. CoinDesk reports: In September, Shoba Pillay was asked by the court to offer an outside view of goings-on at the crypto lender, has now published an account of the firm's operations in the runup to bankruptcy being declared in July. "In every key respect -- from how Celsius described its contract with its customers to the risks it took with their crypto assets -- how Celsius ran its business differed significantly from what Celsius told its customers," Pillay wrote, after interviewing staffers, including former Chief Executive Officer Alex Mashinsky, as well as customers of and vendors to the company. [...]
Despite repeatedly saying he was not selling CEL, and despite employees internally saying the token's true value was zero, Mashinsky sold 25 million tokens to the value of at least $68.7 million between 2018 and bankruptcy, Pillay said. Co-founders Nuke Goldstein and S. Daniel Leon are cited as making CEL sales valued at $2.8 million and $9.74 million respectively. Pillay said Mashinsky's claims to the media and on social media to "always have 200% collateral" were "far off the mark," with 14% of Celsius' institutional loans wholly unsecured in December 2020. That figure rose to nearly 36% by mid-2021 -- and even then some of the collateral was in unstable assets such as FTX's FTT token, Pillay said.
"What Celsius and Mr. Mashinsky never did was correct the record after the fact for the thousands of live audience members who heard these misstatements or for those who watched the recorded videos on YouTube before they were edited," Pillay said. Pillay also uncovered "significant tax compliance deficiencies" in the company, saying that its mining arm may owe over $23.1 million in use taxes, and has reserved $3.7 million in liability in U.K. value-added tax.
Despite repeatedly saying he was not selling CEL, and despite employees internally saying the token's true value was zero, Mashinsky sold 25 million tokens to the value of at least $68.7 million between 2018 and bankruptcy, Pillay said. Co-founders Nuke Goldstein and S. Daniel Leon are cited as making CEL sales valued at $2.8 million and $9.74 million respectively. Pillay said Mashinsky's claims to the media and on social media to "always have 200% collateral" were "far off the mark," with 14% of Celsius' institutional loans wholly unsecured in December 2020. That figure rose to nearly 36% by mid-2021 -- and even then some of the collateral was in unstable assets such as FTX's FTT token, Pillay said.
"What Celsius and Mr. Mashinsky never did was correct the record after the fact for the thousands of live audience members who heard these misstatements or for those who watched the recorded videos on YouTube before they were edited," Pillay said. Pillay also uncovered "significant tax compliance deficiencies" in the company, saying that its mining arm may owe over $23.1 million in use taxes, and has reserved $3.7 million in liability in U.K. value-added tax.
Yes? That is what a Ponzi-scheme does? (Score:5, Insightful)
While crapcoins try to obscure they are Pyramid-schemes behind some pseudo-distribution and flowery language, it has been clear to anybody sane that they are at the very least heavily inspired by the idea. The "Greater Fool Theory" is nothing but an advanced derivative idea of the classical Ponzi scheme. It is hence no surprise at all that some operators in this sphere used the classical Ponzi approach as well.
Re:Yes? That is what a Ponzi-scheme does? (Score:5, Funny)
I am going to make an Etherium 2.1 and call it Centigrade: Rise of the GPUs.
How does that sound? It sounds teriffic!
PM me for details. If you can't figure out how to do that, YOU are not a savvy investor!
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So many layers to the joke, and so few that understand enough to appreciate them. Ethereum 2.1 part almost made me spill my drink.
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Hehehe, nice!
Re:Yes? That is what a Ponzi-scheme does? (Score:5, Interesting)
In investor 2 gives money which helps give good returns to investor 1. Then investor 3 helps give good returns to investor 2, and so on. Along the way investors 1, 2, 3, etc, all claim "this fund is GREAT, I'm beating the S&P 500 by 231%!" That's the classic Ponzi scheme, which was a direct intentional con from day one by Charles Ponzi.
In some newer cases I think the con man gets caught up in a spiral of lies. Ie, Madoff seemingly had a fund where he thought he had a great thing going, all legal and legitimate. Except when it started going wrong, he'd "borrow" from funds to pay off earlier investors. Just a little bit, he'd certainly pay it all back once the market was back on his side again. Except it didn't happen. Like a gambler who turns to stealing, because if they can just pay off the gambling debt things will be fine, they can take that money and gamble that and win so much that they'll pay back people they stole from, but then they lose again and they end up circling the drain committing more and more times until finally caught.
So I think the crypto bros (bras?) may be similar. They may believe their own bullshit, or believe the hype about crypto. So now people give them a lot of money, and they want to grow so they get MORE money, but they can't grow without the capital The banks are reticent about lending because, well, they think it's very high risk despite the bros insisting it's a sure bet. So they see the depositors' capital, the crypto coins, or dollars, or whatever they give the investment/exchange/thingy. Just borrow some of that to grow the business larger, and when larger they'll back fill all that value. And again they're in the same spiral of committing bigger and bigger crimes until they can't back down.
Of course, they are some I am sure who fully intended to defraud everyone. But some of these guys just seem way too naive and clueless that I think they really did believe the myth they were selling.
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Sure, some will actually believe the bullshit because they are not smart enough to see the whole or are deep in delusion. That gambler example is an excellent one. And some others will just be "get rich quick and who cares who gets hurt".
That is maybe the most serious criticism of the whole blockchain-based "currency" idea: It is far too complicated to unterstand for most people.
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That's about the only point in it's favour. Finance people love stuff that's too complicated to understand. That's the only way people will pay them for advice.
Regular currency is too complicated for most people to understand too.
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Co-founders Nuke Goldstein and S. Daniel Leon are cited as making CEL sales valued at $2.8 million and $9.74 million respectively.
Things are really bad when you can't trust a company run by someone named Nuke Goldstein.
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Nope. It is not. But I get that a crypto-moron does not understand the difference between "loan" and "withdrawal", no matter how large and critical it is. Or that regulation carefully restricts what kinds of loans and in what amount a bank is actually allowed to hand out.
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The scheme is probably older than Ponzi. In Dickens' "Martin Chuzzlewit", Montague Tigg sets up exactly such a company.
It shouldn't matter where the funds came from (Score:2)
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Uh, no. That's not true either morally or legally.
Re:It shouldn't matter where the funds came from (Score:4)
Banks don't have ALL the money handy on premises at all time. But they're required to have a certain amount, and they're required to carefully manage whatever they have invested the money into. If there's every a run, the FDIC insures a limited amount of it, but only for those banks that follow the rules amd such. Ie, the classic bank would have much of the depositors' money tied up in mortgages, as that's how some interest can be paid on the deposits. But they need a certain amount of cash on hand to pay out customers as necessary.
What they CANNOT do is take money from a new bank account owner and use that to give 3% interest to a different account. Any interest they pay has to be "earned". If they investments are tanking because the managers were foolish then they can't cheat to make up the shortfall in the hopes that next quarter things will go up. Instead the bank has to admit to their account holders that they lost money.
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If they had simply invested in Bitcoin then we'd all be zillionaires be sue Bitcoin can only go up! Up up up! HODL!111
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So defrauding investors and money laundering is acceptable?
Stop and think for a moment about what you're arguing for.
You didn't understand what I said (Score:3)
If at a given moment a financial institution has sufficient total assets (fairly liquid), not including newer deposits, to pay for the rate of withdrawal,
then it doesn't matter which account the withdrawals come from, even if it is from the new deposit accounts.
That's just mechanics.
It's only a ponzi scheme if they have less liquid capital than needed to pay for the withdrawals, without resorting to new deposits.
You have to distinguish the two cases.
Re:You didn't understand what I said (Score:4, Informative)
What you're describing is the concept that money is fungible, that any designations for the purpose of a particular dollar can't really be tied to that dollar. So, for example, if a charitable institution holds a fundraiser to build a new building, that money frees up money in the rest of the organization, to do whatever it wants.
This is complete different from what Celsius is / was doing, or what a ponzi scheme does. A Ponzi scheme makes up imaginary investment returns, paying them to earlier "investors" using new "investments." The fake gain in the value of the "investment" is the problem.
With cryptocurrency, there is no actual new value generated (returns), the value gains are simply the measurement of how many dollars new "investors" are willing to trade for that cryptocoin. In the end, only early investors get anything, everybody else gets screwed.
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True at a certain level.
However:
1) there are multiple exchanges on which the investments in the cryptocoin can be made, and the operators of the exchanges that process the transactions are not the proprietors (vendors) of the cryptocoin. They are not generally offering the coin at a price they set. Rather, the price is set by the overall, global, market for the coin.
2) The same
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The thing that makes cryptocurrency a Ponzi scheme is not merely that it is crypto. Ponzi schemes are possible with fiat currency as well. What makes *all* cryptocurrencies a Ponzi scheme is that they aren't backed by anything. They only increase in value when more people trade dollars for the cryptocoin, and people only realize gains when they withdraw their coin for dollars, after other "greater fools" jumped onto the bandwagon.
Fiat currency is backed by governments (not gold). If the US dollar starts to
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Second, your thesis would not be valid for any cryptocurrency which becomes an accepted currency of exchange for real goods and services. For such a cryptocurrency, its value is NOT only realized when exchanged for fiat currency. Just like any traditional curr
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Funny how a financial claim (Score:3)
Making specific claims about being “200% collateralized” while not being so. New York AG is gonna have a field day with him. Easiest fraud conviction ever.
I wonder if Musk realizes how close to the legal-cliff-edge his “funding secured” tweet took him.
The Ponze, eyyyyyyy (Score:2)
Reminder that Social Security is also, mathematically, a Ponzi scheme. It struggles to meet outlays, in spite of forcing everyone in by law.
Having insufficient investors, it must borrow from investors not yet born.
Better schemes would have built up money and invested it somehow, and not by giving it to government to spend, where it must eventually borrow or tax it out to pay back, the entire point of building up a surplus in the first place.
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Actually, the big problem with Social Security is that Congress keeps "borrowing" from the supposedly dedicated fund to pay off unrelated debts, so that instead of being a huge pile of money gathering interest it's got a huge pile of I.O.U.s with no sign that they'll ever be repayed.
Force Congress to repay those loans, with appropriate interest, and Social Security doesn't have any serious financial problems.
used new customer funds to pay for other customer (Score:1)