However, the collapse of the Terra Luna stablecoin in May 2022 blew a billion-dollar hole in Celsius’s balance sheet, which, coupled with a slump in the crypto market, left Celsius unable to cope with a wave of withdrawals. from customers. On June 12, the company announced it would halt shooting, citing “extreme market conditions”. A month later, the company filed for Chapter 11 bankruptcy, trapping $4.7 billion of its clients’ money.
A similar pattern has played out with other cryptocurrency lenders: BlockFi, Voyager Digital, and Genesis Global Capital have all since filed for bankruptcy, overtaken in various ways by the failures of the Terra Luna stablecoin, hedge fund Three Arrows Capital, and crypto exchange FTX.
“Over the past 18 months, it has become very clear that centralized borrowing and borrowing companies are a huge problem. They eventually became the epicenter of the collapse, says Kling, whose fund has significant assets still tied up in the FTX bankruptcy. “There was so much reckless borrowing.”
The public nature of the ledger on which crypto sits, says Kyla Curley, a forensic accountant and partner at consulting firm StoneTurn, means Celsius would eventually be caught. “If the data tells a story, government agencies will notice and prosecute,” she says.
In the year since Celsius was declared bankrupt, Mashinsky has been accused by creditors of lying about the nature of the service, and by an independent investigator commissioned by the bankruptcy court of running a Ponzi scheme whereby payouts to existing customers are effectively others were financed by deposits.
In crypto circles, Mashinsky’s arrest was considered “long overdue,” added Cory Klippsten, CEO of trading platform Swan Bitcoin.
The DOJ indictment states that while Mashinsky portrayed Celsius as a “modern day bank,” he instead operated the company as “a high-risk investment fund, taking money from customers under false and misleading pretenses and turning customers into unwitting investors in a company far more risky and far less profitable than what Mashinsky had represented.
The “litany of indictments,” says Lisa Bragança, attorney at Bragança Law and ex-branch chief at the SEC, will be “devastating” for Mashinsky. “It’s a hell of a lot for the government to prove,” she says, “but it just needs pieces of evidence” to secure a significant prison sentence. It’s also likely that prosecutors obtained testimony from Celsius insiders, Bragança explains — “and that’s big.”
Upon hearing of Mashinsky’s arrest, a number of Celsius creditors gathered in group channels on Telegram and elsewhere to celebrate: “Fuck yeah,” one creditor wrote. “I’d like to see an offender walking,” said another. But some were more reserved, pointing out that the arrest will do nothing to speed up asset recovery. “I wish there was a way to end this madness sooner,” one channel member wrote.
Others have an uneasy feeling that crypto has not yet managed to pull the bad actors out of the stacks and that should another hype cycle come around, the conditions that spawned Celsius and FTX could return. In short, those lessons have not necessarily been learned.