Crypto lender Celsius sued by its own ‘hapless’ money manager

British parliamentary backstabbing has nothing on crypto, where the sinking of Celsius has left a trail of chaos in its wake.

KeyFi, a former asset manager for Celsius, on Thursday sued the token lender for breach of trust. The suit filed in New York on Thursday accuses Celsius of using customer funds to manipulate markets and of failing to put in place even basic accounting controls, which resulted in “severe exchange rate losses” when markets moved against it.

Prior to Plaintiff [KeyFi] coming on board, Defendants [Celsius] had no unified, organized, or overarching investment strategy other than lending out the consumer deposits they received. Instead, they were desperately seeking a potential investment that could earn them more than they owed to their depositors. Otherwise, they would have to use additional deposits to pay the interest owed on prior deposits, a classic “Ponzi scheme.”

The recent revelation that Celsius does not have the assets on hand to meet its withdrawal obligations shows that Defendants were, in fact, operating a Ponzi-scheme.

Celsius suspended redemptions on June 13 and has been reviewing rescue options.

KeyFi’s CEO Jason Stone set out his company’s case in a very lengthy thread on the previously anonymous Twitter account of 0xb1, which has near-legendary status in the DeFi community. 0xb1 is an Ethereum wallet address that for a time made it the third biggest whale on the network, behind Sam Bankman-Fried’s Alameda Research and Tron founder Justin Sun.

Stone confirmed suspicions that 0xb1’s main purpose was yield farming — depositing tokens for interest, commonly paid in a native token such as Celsius’s cel coin. Celsius had started transferring customer funds to KeyFi/0xb1 in August 2020 and by the time the companies’ relationship ended in early 2021 it was managing nearly $2bn of assets, he said:

Celsius had no immediate comment on the lawsuit, Reuters reported.

Into this already murky scene on Friday came a report from research group Arkham Intelligence, whose unidentified authors say they have investigated Celsius’ relationship with 0xB1.

According to Arkham, 0xB1 was using Celsius funds to buy NFTs and deposit cash on yield-bearing decentralised exchanges including Compound and AAVE. And, according to Arkham’s analysis, it lost big:

On Thanksgiving Day, November 26, 2020, the price of ETH dropped 17%, from nearly $600 to below $500. As a result, Compound liquidated 0xB1 for 50K ETH, worth $24 million at the time. Between February 22 and 23, 2021, the price of ETH dropped almost 30%, from above $1.9K to below $1.4K. Compound liquidated 0xB1’s position yet again, this time for 30K ETH, or $37 million. Ultimately, it appears 0xB1 lost $61 million of what appears to be Celsius money in liquidations.

[ . . .]

0xB1 appears to have returned the majority of funds back to Celsius between September 2020 and September 2021, totalling $1.14 billion of crypto assets in that time frame. This 113% USD-denominated profit may appear to be an exceptional return on Celsius’ $534 million investment. However, the performance is not nearly as impressive when denominating 0xB1’s performance in the crypto assets it received from Celsius rather than in US dollars. Over the course of Celsius’ relationship with 0xB1, Bitcoin increased in value from around $11,000 to around $60,000 per Bitcoin, a gain of over 400%. Ethereum, another significant asset Celsius entrusted with 0xB1, rose from almost 900% from around $400 to nearly $4000 per ETH. More plainly, had Celsius held these assets instead of sending them to 0xB1, their value would have been $1.49 billion – over $350 million more than what 0xB1 appears to have returned.

Even more murky is 0xB1/KeyFi punt on NFTs, Arkham claims:

Despite spending 3,535 ETH on NFTs, 0xB1 only ever sold 76 ETH worth of said NFTs. One of the highest-priced NFT projects is CryptoPunks. 0xB1 purchased three CryptoPunks for a total of 390 ETH. Towards the end of 0xB1’s relationship with Celsius, the wallet transferred these NFTs to an Ethereum wallet address starting with 0x50D. On top of this, fourteen other CryptoPunks that 0xB1 received via transfer were also send to this 0x50D address. Coincidentally, this is the same wallet that bought the NFT used as 0xB1’s profile picture, Mutant Ape Yacht Club #4849. Given 0xB1’s ownership of this Mutant Ape and that the Celsius-funded wallet bought the CryptoPunks, it is probable that 0xB1 transferred CryptoPunks purchased with Celsius funds to its possession.

Interestingly, on June 7, 2021, weeks after the termination of Celisus’ and 0xB1’s relationship, the 0xB1 wallet transferred three “Meme Ltd.” NFTs to the Ethereum address “usastrong.eth.” USA Strong is the business of Celsius CEO Alex Mashinsky’s wife, Krissy Mashinsky. This wallet belongs to her.

One takeaway from Arkham’s report may be that, by secretly using customer money to back a pseudonymous leveraged gambling shop, Celsius did much worse than it would have done under its previous strategy. Whether that finding strengthen or weakens Stone’s compensation case against Celsius will be a matter for the court.

Further reading:
Behind the unravelling of Celsius – FT

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