Celsius Network: A Crypto Cautionary Tale?

The collapse of cryptocurrency bank Celsius Network was one of the main drivers of the spring 2022 crypto crash, which erased nearly $1 trillion from the market and depleted the funds of thousands of investors. Hosts Zachary Pyers and Kenton Steele discuss the rise and fall of this crypto bank and where things stand now.

Be sure to check out the video version of this interview on our YouTube page.

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Transcript

ZBP     Zachary B. Pyers, Esq.

KHS    Kenton H. Steele, Esq.

ZBP

            Welcome to today’s episode of the Reminger Report Podcast of Emerging Technologies.  Previously we’ve covered a couple of topics as it relates to cryptocurrency and the blockchain technology.  We’ve covered FTX’s downfall and collapse.  That was with one of our colleagues, Zach Durant.  I’ve also previously done kind of a introduction so to speak as it relates to the blockchain technology and it’s uses and today Kenton is going to be talking to us about another cryptocurrency issue and that is the Celsius Network, LLC.  So, he is going to kind of giving us the backstory and kind of maybe a cautionary tale so to speak about Celsius.  So, Kenton, again thanks for joining us.   Kenton, tell us a little bit about what is Celsius.  

KHS

            So, Celsius Network was essentially presenting itself as a cryptocurrency bank. People could open accounts, deposit their crypto assets with Celsius in a Celsius account, and Celsius also offered loans and allowed people to use cryptocurrency as a security for those loans.  So really a lot of similarities to a bank.  Now the fact that Celsius sort of looked like a bank and operated in a way that we see banks operate is notable because the founder of Celsius the sort of public figure behind Celsius was the CEO Alex Mashinsky and his pitch for why people needed to use Celsius and use cryptocurrency was that traditional banks or Tradfi or traditional finances a term that he used a lot was this despicable industry and he was pretty famous for always wearing shirts that said banks are not your friends whenever he was in public and selling merchandise that was you know making derogatory statements about banks or Tradfi.  In his reel, the substance of Alex Mashinsky’s pitch was that banks are victimizing all of their customers because banks give these loans with high interest rates and the profits from those loans are kept by the bank rather than passed on to the depositors whose funds serves as the basis for those loans and really what Celsius’s pitch was is that people who deposited their crypto with Celsius would become part of the Defi or decentralized finance movement and they would be allowed to keep 80% of the profit from the interest on the loans that Celsius was paying out.  It later, you know, sort of, if we jump to the end of the story here, that Celsius was not decentralized in any way was actually very centralized, was not part of a real decentralized finance movement and its status as a crypto bank sort of pseudo bank was really misleading in that Celsius was actually operating in what’s been described now as a massive Ponzi scheme. Where the, what was paid out to the last round of investors was actually coming from the newest people who were depositing their money.  But there was actually not value being generated by the company itself.

ZBP

            Now you mentioned Celsius’ s founder CEO, Alex Mashinsky.  What can you tell us about him?

KHS    

            So, he’s an interesting figure.  I think you see that with a lot of these cryptocurrencies or sort of tech companies that grow very rapidly.  There’s usually a figure or someone that with a face that people can put to a company.  I think the positive example you think of is like Apple with Steve Jobs, right.  He’s the genius behind the scenes who’s making everything run.  On the negative side you have like FTX with Sam Bankman-Fried who you know was initially perceived as Oh, he’s kind of this person who is going to be the disruptor and change the theme and later sort of vilified and identified as a scammer.  I think Mashinsky falls somewhere on that spectrum.  So, on the surface he appeared to be somebody who had the qualifications to operate and maneuver in sort of a new tech space.  He claims to have invented voice over internet protocols.  This was an industry he had worked in at some point in the 90s and he does have patents under his name related to voice over internet or VoIP.  But his patents are dated to like 1994 and there were companies that were selling VoIP services as far back as 1990.  So calling himself the inventor of VoIP is certainly, if not outright misleading, it’s a big stretch of the truth.  So maybe ne was involved in this space and had success with companies but he certainly not an inventor of this technology.  If you go further into his background, he had initially got into business through sort of trading in materials from China and other parts of the world that are used in the production of gold.  He at some point made the jump from that type of background into the technology space.  He went on from VoIP to working in cell towers, selling cell towers and subways in major cities and then went from cell towers to Wi-Fi and from Wi-Fi then into the crypto space in 2017.  Sort of described as this serial entrepreneur is a term you see thrown around a lot when Mr. Mashinsky comes up and his background as the claimed inventor of VoIP.  He would use that to say that Celsius was going to serve as money over internet protocols or VoIP which is a terrible name.  It sounds like some kind of skin condition.  Not a service you’d like to use.  But that was really his pitch.  He held a weekly you know ask me anything sessions where people could present questions to him and he would answer them.  It is now since Celsius’s downfall then identified that.  He would often make very misleading and false statements during these ask me anything sessions.  The company would then go back and edit those out and post the video without identifying or correcting the false statements that he was making.  So, again, he’s sort of the person who people were investing with.  The person people were putting their trust in and now looking back sort of in the stark light of day.  It seems obvious that he was maybe not the person who should have been trusted with all of peoples’ financial security.

ZBP

            You talked a little bit about kind of like the rapid growth and expansion of Celsius and kind of how it took off.  What did it look like?  How do you explain kind of that rapid growth of Celsius during its tender?

KHS

            Sure, so we’ll kind of take that in two parts.  On the one side, we have the sort of big numbers, right.  How to we define the growth of Celsius through the numbers.  If you look 2017/2018 Celsius started and did a ICO or initial coin offering of the Celsius token also called cell, Cel for short.  That was about a $50M coin offering of that Celsius token.  If we fast forward you know through 2018, 2019, 2020, by October 2021 the value of Celsius as a company was approximately $3B and they were closing in by 2022 on having almost 800 or 900 employees worldwide.  But then by mid 2022 the bottom kind of dropped out of the company. But what fueled that growth.   What allowed them to generate that increase in value.  A lot of that had to do with the Cel token and sort of the promise of what Celsius was offering right.  We talked about the pitch being that banks were terrible and Celsius was the alternative.  I think that’s a narrative that is inherently appealing to people. Banks are not always used as the most favorable industry.  And positioning yourself as the alternative to the traditional banks that’s going to return all the profits to the people is a pitch that makes sense, right. Alright, I’m going to deposit my assets here and when the loans are made based on those assets, I am going to get 80% of the profits with 20% going to Celsius.  There were no fees for opening accounts.  This was really, the pitch was that you would just get this passive return on your deposits with Celsius.  At times they said it was a high as 17% for certain crypto assets.  All you had to do was put them in an account with Celsius and you get 17% a year on them.  How did they get to that 17% a year figure and the way they did that was through the Celsius token. In order to sort of create a demand for that token or a market for it, what they allowed people to do is if you were going to be paid the interest on your deposits, you could elect to take payment in the form of the Celsius token.  If you chose to take payment in Celsius token, you would get a 30% bump on what you were going to get paid.  If you consistently elected to accept payment from the Celsius token you would get a royalty bump as well and gain an extra 30% on top of that 30%.  So you can see how this kind of grows out of control to where it suddenly makes all the sense in the world if you accept the Celsius token as a form of payment on your interest.  So, in that Celsius token it started at zero, right, and as a certain point in time each token had a value of close to $8.  At its height, today that value is about 15 cents.  So, you kind of see how that number goes from $50M in 2018 to $3B by 2021, late 2021. But like we said, due to a lot of reasons the bottom kind of fell out around summer of last year. 

ZBP

            Tell us what kind of lead to that downfall.

KHS

            So as with most things there’s a lot of different reasons.  There was obviously a lot of disruption in the crypto space in summer 2022.  But the things that sort of precipitated that are in late 2021 regulators from various US states started to investigate Celsius for dealing with unregistered securities.  Some states issued cease and desist letters, others filed civil lawsuits.  Now throughout all this time the lawsuits were being filed and the cease and desist letters were being sent.  Alex Mashinsky continued to host his weekly talks where he would describe the Cel token as being registered making it seem like it was a registered security when in fact it definitely wasn’t.  It never was a registered security but that didn’t stop him from calling that.  As with most steams that sort of offer these unrealistic returns without a clear explanation of how it’s happening, people started to dig deeper into how do we get to that 17% deal for nothing.   And really what was driving that is Celsius was overleveraging the assets that they had making very risky investments.  And again you get back to what the terms that Celsius was using as make a deposit and then you can withdraw your funds.  But, once you looked closer, once the cracks started to show, it became clear that these weren’t actually deposits you were making.  The way Celsius described it in its terms of service was each deposit was really a loan made to Celsius and when you went to withdraw that loan, you were sort of calling the loan due.  That is what was happening and Celsius was not operating like a bank it was more operating like a hedge fund where it would take it collection of assets and invest them in other cryptocurrencies sometimes double investing the same cryptocurrencies in multiple places.  And people called out that hey any sort of shift market moving in either direction is going to collapse this entire thing and that’s exactly what happened.  Early in summer of 2022, we saw the collapse of Luna, a sort of separate cryptocurrency crypto entity and that sort of spilled over into Celsius.  Now, in June of 2022, Alex Mashinsky kept doing his weekly ask me any sessions and was telling everybody that Celsius had no liquidity problem and anyone who was saying otherwise was just spreading FUD - FUD the acronym for fear uncertainty and doubt which is thrown a lot in the crypto space.  Mashinsky really was telling everybody there’s no problem at all.  Anybody can get their money out at any time.  That continued until June 12, 2022.  Alex Mashinsky was still sharing things on twitter, making statements, encouraging people to deposit their assets with Celsius.  Then on the morning of June 13, 2022, Celsius paused all customer withdrawals in order to, in their words, stabilize liquidity and operation and the reason that was necessary was “extreme market conditions.”  That pause has continued and one month after that pause was put in place Celsius filed for Chapter 11 bankruptcy protection.  The declaration filed in connection with that bankruptcy reported a $1.2 billion deficit in assets on Celsius’s books.  

ZBP

            So tell us, you were talking about events that happened in June which was 9 months ago or 10 months ago.  Tell us where do things stand now with Celsius?

KHS    

            So, the bankruptcy process is playing out and through that process there’s a lot of putting things under a microscope that were taken for granted and we’re finding out a lot about Celsius.  For instance, in this instance another sort of common thread with FTX.  Celsius was running its entire $3 billion operation through Quick Books and did not really have  the sort of learned financial oversight you would expect from an operation that was that size.  But as I talked about with this deposit, they were really unsecured loans to Celsius meaning that after this bankruptcy, there’s really not much for those individual depositors to do.  Now, through the bankruptcy process there are certain account holders who are able to recover some portion of their money.  That’s actually been coming out in the past few days.  But, this investigation is part of the bankruptcy process has lead investigators to describe it as one of the largest Ponzi schemes in the history of the United States.  Mr. Mashinsky personally is facing a lot of legal problems through civil lawsuits and criminal investigations relating to him having sold Celsius assets at a time when others were not able to withdraw funds and having sold Celsius assets and Cel tokens.  He was the largest seller of Cel tokens as he was instructing everyone else to hold on to them or HODL – hold on for dear life, a term you see a lot in the crypto space, at a time where he was encouraging people to HODL he was selling everything that he could from Celsius and made a tidy profit in the realm of $10M.   Now as that’s been investigated and found out it will be interesting to see what regulators or government authorities through civil lawsuit people are able to recover from Mr. Mashinsky and Celsius.  But really where we’re at is that Celsius along with FTX, Luna, Safe Moon, these other crypto sort of horror stories stands as an example of sort of a volatility and dangers inherent in this space that anyone should be aware of if they’re planning on giving any of their assets in cryptocurrency.  

ZBP

            Kenton, we appreciate your time and walking us through this today.  I am sure that our listeners will appreciate it too as we keep track of this story as well as the FTX and the others you mentioned so thank you.

KHS

            Thank you.