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Inside Celsius: how one of crypto’s biggest lenders ground to a halt

By Kemal Pasha

When Daniel Leon, one of the founders of Celsius Network, posted a Twitter video addressed to Warren Buffett in January 2021, he was in high spirits. The price of bitcoin was rocketing and Celsius, the crypto lender he had founded in 2017 with Alex Mashinsky, was riding the boom.

“Warren, Warren, Warren,” Leon began with a wry smile, mocking the American investor’s scepticism about bitcoin and butchering one of Buffett’s best known aphorisms on long-term investing: “My friends and I are planting a tree of transparent and decentralised cryptocurrencies so that future generations can enjoy the shade of prosperity and financial liberation.”

Just 18 months later Celsius faces the threat of bankruptcy. In mid-June, facing mounting withdrawal requests, it froze its customers’ funds trapping the deposits of hundreds of thousands of investors who had entrusted their savings to the lender.

The Celsius crisis has been labelled the crypto community’s “Lehman Brothers moment”. It is one of the largest crypto companies to fall victim to a brutal sell-off in token prices this year, as interest rate rises prompted investors to flee risky assets. The chill deepened in May when a $40bn cryptocurrency called Terra imploded. At least a dozen hedge funds, exchanges and lenders such as Celsius have crumbled, blocking customer withdrawals, raising money at fire-sale prices, or collapsing into bankruptcy.

Celsius relied on a stream of deposits from retail investors that it lent to large crypto companies and used for risky bets on untested ventures. It promised exceptionally high interest rates while also claiming the risks were small. In 2021, as demand for loans from institutional investors waned, Celsius began taking greater risks to generate yield. Today people with knowledge of the company say it has a sizeable hole in its balance sheet — as big as $2bn, according to one person.

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Interviews with a dozen former Celsius employees, as well as customers, investors and industry executives, reveal that the company was poorly positioned to ride out the market turbulence. Internal documents reviewed by the Financial Times back up these concerns. The company’s own compliance department warned of poor oversight, weak internal systems and the possible misrepresentation of financial information.

Together, they suggest that a reckless pursuit of high returns, as well as losses from a string of bad bets, contributed to the downfall. Celsius did not respond to requests for comment.

Customers now face losing their savings. Even as the market declined and Celsius’s native token, CEL, fell from its 2021 peak of $8 to under $1 today, the company urged customers to “hodl” — or keep hold of their investments rather than sell. Yet internal documents show that Leon and some of his colleagues had already sold millions of dollars’ worth of their own CEL holdings back to the company. Former employees say documents recording these sales have been requested by the US Securities and Exchange Commission.

The risky practices at Celsius and other companies that blossomed during the crypto boom now present a challenge for legislators and regulators, who face questions over why they did not do more to protect ordinary investors.

There are signs that a regulatory crackdown is on the horizon. The day after Celsius froze funds, SEC chair Gary Gensler, who has said crypto tokens probably meet the definition of securities, warned investors of products that seem “too good to be true”. ECB president Christine Lagarde suggested the bloc’s new crypto rule book “should regulate the activities of crypto-asset staking and lending”.

“Regulation was inevitable,” says Jeff Dorman, chief investment officer at crypto investment firm Arca. The turmoil at Celsius and other lenders, he adds, “definitely speeds up the inevitable”.

Crypto’s shadow banks

Celsius is one of several crypto lenders founded during the last boom in digital assets in 2017. Alongside its competitors, it filled a gap in crypto markets for banking services.

These lenders took in customer deposits and lent out the funds at higher interest rates, making a profit from the difference. But, unlike mainstream banks, they were largely unregulated and offered the kinds of interest rates rarely seen in traditional finance. Celsius offered as much as 18 per cent annual interest until the day it froze customer funds.

A special ingredient in the Celsius business model was that it offered its top interest rates only to customers who agreed to receive the interest payment in the company’s CEL token, an asset over which it had considerable control.

Celsius was the biggest holder of CEL and included those holdings as an asset on its balance sheet. It was also a major buyer of the token, purchasing the CEL interest it owed to customers on the open market each week. Crypto analysis firm Arkham Intelligence estimates Celsius has spent $350mn since July 2019 on such purchases.

While the company was buying, top executives were selling. On the same day Leon posted his video touting the future of crypto, Celsius trading records show that he sold $1.8mn of CEL back to the company — one of 16 disposals of CEL by Leon to Celsius between October 2020 and August 2021 that generated $11.5mn in total. Leon did not respond to requests for comment.

From October 2020, over about a year, Celsius managers sold more than $40mn-net-worth of CEL back to the company, the records show. They provide a partial picture of the executives’ dealings as they do not include CEL bought or sold through other channels, such as on the open market. Mashinsky said this year that Celsius founders still retained around 90 per cent of their original CEL holdings. It is not illegal for crypto entrepreneurs to sell tokens their companies issue.

Nuke Goldstein, a Celsius co-founder who calls himself “el presidente of innovation”, sold $4.1mn worth of CEL between November 2020 and May 2021. In an email response to the FT, Goldstein said he was seeking permission to comment from Celsius. In May, he tweeted “my [CEL] rewards created an enormous tax liability (reported as income) and I was selling some to cover and hedge”, adding that he saw “no logic” in claims that Celsius’s founders were selling CEL to line their pockets.

Mashinsky, Celsius’s chief executive, is listed as making a single $500,000 sale in October 2020. Former employees believe he made additional sales through other channels. Based on public blockchain data, Arkham estimates he sold $44mn worth through exchanges. Mashinsky did not respond to requests for comment. Last December he tweeted: “All @CelsiusNetwork founders have made purchases of #CEL and are not sellers of the token.”

A person holding a mobile phone with logo of Celsius Network on screen
A special ingredient in Celsius’s business model was that it offered its top interest rates only to customers who agreed to receive part of the interest payment in the company’s CEL token © Alamy Stock Photo

Mashinsky promoted the business using the rhetoric of rigged systems and greedy bankers. In video addresses and online Q&As, he claimed to be delivering financial freedom to his community. “There is a continuing squeeze of the 99 per cent by the 1 per cent to extract more profit,” he told the FT last year. By contrast, he said, Celsius was funnelling interest back to its customers. “We are actually safer than most banks,” he said in a 2020 interview.

In fact, Celsius was making aggressive bets with client funds similar to the kind regulators sought to police in banking after the financial crisis. Rather than merely lending funds to institutional borrowers, Celsius supported its yields by trading customer funds, according to company accounts and former employees, and putting money into esoteric, risky and novel ventures in the world of decentralised finance, or “DeFi”. The company has denied trading customer assets.

Investing in DeFi “significantly changed the risk profile of what was happening . . . [it] gives you very high yield for immensely higher amounts of risk,” says Simon Dixon, an investor in Celsius who also has tens of millions of dollars deposited with the company. He says he is “100 per cent sure” that there is a hole in the balance sheet which he attributes to bad bets and a failure to manage the company’s rapid growth.

Celsius became a huge source of funds for DeFi projects, with billions of dollars of exposure from 2021. Its rapid entry into DeFi outstripped its ability to manage the risks, say former employees. Such was the novelty of the market that one former employee recalled traders watching online videos on how to trade in DeFi.

Although many missteps were made in the nascent market, Celsius acquired a reputation for being especially accident prone as a series of projects it backed went awry, causing it more than $100mn of publicly known losses.

The most embarrassing involved a project called BadgerDAO, which had been hacked in 2021 and issued a new token to investors including Celsius to mitigate losses. This token gave investors rights to any future profits and recovered monies on one condition: that they did not sell. In March, Celsius did just that. Its pleas for a reversal were rejected.

“Every time there’s a blow up, it’s always Celsius money,” joked a trader at a major crypto brokerage.

Red flags

Inside Celsius, there were misgivings. The company had dived into DeFi in 2020 feet first, without doing full diligence on the projects it was backing and without proper systems for tracking assets, according to former employees and internal documents.

The compliance team flagged concerns. In February last year they produced a document, seen by the FT, warning that it had been possible for certain employees to invest money into new funds without gaining explicit permission and in the absence of compliance checks. The document also warned that employees could move assets from one fund to another without it being apparent to bosses, which could allow them to disguise losses and to “obscure the true value” of assets under management.

“The company may be inflating its representations of AUM and driving up stock price/token price using false financial information,” the document warned. “Celsius may face increased scrutiny from regulators for lack of controls and lack of governance.”

Celsius’s reported assets under management had surged from $10bn in March 2021 to a peak of $25bn later that year. The number of staff leapt from around 150 to more than 550 during 2021. While it claimed to have 1.7mn customers, former employees say the number was far lower — in the low hundreds of thousands — when unused and duplicate accounts were stripped out.

Tracking Celsius’s assets was difficult, former employees say. At times, internal databases did not give the same AUM figures and the process for reconciling positions across the company called “the freeze” often threw up discrepancies. The trading desk largely operated manually on the exchanges it used. “We were clicking in with billions of dollars like any small trader would with $10,” one former trader says.

These shortcomings were echoed in a lawsuit filed last week by Celsius’s former head of DeFi Jason Stone, who worked at the company from August 2020 to March 2021. Stone, who says Celsius owes money to his company, KeyFi, claims he began managing what would become billions of dollars for Celsius on a “handshake agreement” that was not formalised for months. He claims Celsius failed to hedge against his trading properly — resulting in losses of $350mn, according to Arkham estimates.

As customers pulled their money from Celsius this year, first in response to the broader panic in the market and then driven by concerns about the company itself, a classic bank run was set in motion.

In the days before it froze funds in June, Celsius executives were locked in behind-the-scenes talks with a would-be saviour: the 30-year-old billionaire Sam Bankman-Fried. His companies, including crypto exchange FTX, have extended rescue loans to two other ailing crypto lenders: Voyager, which last week filed for bankruptcy, and BlockFi. He was open to offering Celsius a bailout, according to a person familiar with FTX’s account of the negotiations.

Initially FTX executives believed the problems at Celsius were simply a liquidity mismatch. The company had promised its investors instant access to their funds, but had then locked up some of their cash to earn interest in a part of the Ethereum network where it could not be redeemed for several months. FTX was considering offering a loan to bridge the gap.

But as talks progressed, the FTX team were shocked by the scale of the problems they discovered. On their fourth call to discuss a bailout, Celsius revealed a $2bn hole in their balance sheet, according to the person familiar with the talks. For FTX’s negotiators, it was never clear whether the Celsius representatives had a complete picture of the finances. The talks ended when Celsius publicly announced it was halting withdrawals.

The watchdogs

In late 2021, Celsius celebrated its biggest achievement. The company had raised $750mn from WestCap, the fund led by former Airbnb and Blackstone executive Laurence Tosi, and Caisse de dépôt et placement du Québec, Canada’s second-largest pension fund. It valued the company at more than $3bn.

Mashinksy hailed the investment as a vote of confidence in the company from mainstream financiers. WestCap and CDPQ had invested despite Celsius’s brushes with US and British regulators.

Celsius had been targeted by several US state regulators who alleged it was making risky trades with customer money. The regulatory status of CEL is still unclear. “There’s a regulatory grey area,” says Dixon. “Are these securities? Are these not securities? And what laws [do] they have to follow?”

The company’s clashes with the UK’s Financial Conduct Authority led it to relocate its headquarters from London to Hoboken, New Jersey in June 2021. At the time, the FCA was rolling out a new registration regime for crypto companies. Celsius announced its departure by saying it had withdrawn its FCA application because of “regulatory uncertainty”. Two former employees say the company faced scepticism from UK authorities. One says the FCA viewed Celsius as a collective investment scheme and therefore should be subject to tougher rules. The FCA declined to comment.

In spite of these issues, WestCap and CDPQ in October boasted of the due diligence they had done before investing in Celsius. “We are very careful . . . our due diligence process is very serious,” CDPQ told the FT at the time. Westcap and CDPQ declined to comment for this story.

Some existing Celsius investors were wary of putting more money into the company. Dixon had invested in 2020 with investors on his BnkToTheFuture crowdfunding platform and Tether, the stablecoin issuer. But he declined to join the larger follow-up round in 2021.

“Our normal due diligence process can take a month. We weren’t complete after eight months,” he says. “We kept requesting stuff and there was just pressure to close without providing the additional documentation that we needed.”

Since it froze funds in June, Celsius has been largely silent. It has stated it is trying to “stabilise liquidity and operations” and is exploring “strategic transactions as well as a restructuring of our liabilities”. US state regulators are investigating the funding freeze. WestCap’s Tosi resigned from the board on June 22.

Dixon says Mashinsky has resisted advice to file for bankruptcy. “Alex is trying to avoid bankruptcy at all costs,” he says. He sees the story as a cautionary tale about how “innocent people” were drawn in by “incredibly misleading” marketing. The former Celsius trader puts it another way: Mashinsky had “wanted to look like a Robin Hood”, but the company he built was “just a bank in the wild west”.

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Kemal Pasha