Financial Crime: Crypto lender Celsius had been dogged by red flags for months ahead of withdrawal freeze

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The red flags started waving around cryptocurrency lending platform Celsius Networks late last year.

That’s when the company’s then-chief financial officer, Yaron Shalem, was charged in Israel in connection with an alleged crypto scam that Israeli police say defrauded victims around the world.

The alleged fraud predated Shalem’s days working for Celsius, but his arrest couldn’t have come at a worse time — just as the company had closed a $750 million funding round that valued it at $3.5 billion.

While the charges against Shalem were initially kept under seal in Israel, news of his arrest leaked out in the press almost immediately. Yet it took Celsius days to acknowledge that the man responsible for minding their books had been implicated in a major fraud case at another company.

Shalem was eventually suspended and has since left the firm, the company has said. Lawyers for Shalem have denied that he was engaged in any wrongdoing.

In the months prior, Celsius had been hit with several cease and desist orders from regulators in New Jersey, New York, Kentucky, Alabama and Texas, demanding it stop selling its primary investment product because it was unregistered and in violation of state laws.  Celsius had been paying high rates of interest to customers who kept their cryptocurrencies on the platform at a time when most investment products struggled to provide meaningful yields to investors.

Celsius founder Alex Mashinsky said in January that regulators had come back with a “thumbs up” after looking into the company’s business. He kept running the company out of Hoboken, N.J.

Then, in late January, Bloomberg reported that the Securities and Exchange Commission had begun taking a closer look into Celsius’ operations.

Previously, it had emerged that the company’s former head of institutional lending from 2018 until 2020, who was in control of hundreds of millions of dollars in assets, had little background in finance or crypto, and had once worked in the porn industry. 

A message sent to representatives of Celsius wasn’t immediately returned.

In recent months, the entire crypto market has been in free fall, with some leading currencies like bitcoin
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-14.09%

and ethereum plunging by more than 60%, and other blockchain-backed coins seeing their value evaporate completely. 

Celsius saw its asset under management dip from what it said was $26 billion in October to $12 billion as of May. The company said $8 billion of that had been loaned to investors.

Late on Sunday, it all came tumbling down: Celsius announced that it was freezing all withdrawals, swaps and transfers by investors, citing “extreme market conditions.”  

“We are taking this necessary action for the benefit of our entire community in order to stabilize liquidity and operations while we take steps to preserve and protect assets,” the company said in a statement,

While Celsius could recover, the move raised serious questions about its solvency and triggered a broad sell off of crypto currencies on Monday. Major stablecoin issuer, Tether
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-0.01%
,
had been a large investor in Celsius. On Monday, Tether issued a statement describing Celsius’ woes as the “unfortunate result of market volatility and extreme market conditions,” and that they had no impact on “our own reserves or stability.”

At the heart of this situation is Celsius’ offer to pay an eye-popping 12% interest to customers who parked their bitcoin and other high-value cryptocurrencies on the company’s platform. To fund this, Celsius said it sold its own coins, offered high-rate defi loans and had plans to open its own crypto mining operations. In recent years, numerous other lenders with similar type business models have popped up.

But market watchers have long been skeptical that the numbers added up or if the model was strong enough to withstand a serious market downfall.

It may now be up to financial regulators to figure it all out.

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