New York Attorney General Letitia James on Thursday sued the founder of collapsed cryptocurrency bank Celsius Network, accusing him of plotting to defraud hundreds of thousands of investors.
The lawsuit stems from Celsius’ implosion this summer, when the company filed for bankruptcy and its customers lost billions of dollars in deposits. For years, Celsius founder, Alex Mashinsky, 57, tricked customers into depositing their crypto savings on the platform, promising it was as safe as a traditional bank, the lawsuit alleged. The lawsuit seeks to bar him from doing business in New York and force him to pay damages.
“When Celsius suffered losses on high-risk investments, Mashinsky did not disclose those losses to investors,” the lawsuit said. “The collapse of Celsius has left many people in a state of despair and financial ruin.”
A spokesman for Celsius said in a statement that Mr Mashinsky was no longer involved in the company’s management. Mr. Mashinsky did not respond to a request for comment.
The lawsuit is the government’s latest aggressive response to the high-risk practices and widespread fraud that plunged the crypto industry into crisis in 2022. Last month, US prosecutors charged Sam Bankman-Fried, the founder of collapsed crypto exchange FTX, with widespread fraud. Mr. Bankman-Fried also faces civil charges from the Securities and Exchange Commission and the Commodity Futures Trading Commission.
On Wednesday, the SEC also pushed back on plans by the US arm of giant crypto exchange Binance to buy Voyager Digital, a crypto-lending operation similar to Celsius that failed around the same time.
Before FTX went bankrupt in November, Celsius’s failure was considered perhaps the worst moment of crypto’s disastrous 2022. For years, Mr. Mashinsky had promoted the company with a marketing promise that was too good to be true: interest rates as high as 17 percent on crypto deposits.
As the industry boomed, he became one of the most successful and charismatic pitchers. He frequently appeared in YouTube videos promoting Celsius as a populist and egalitarian alternative to the traditional banking system, which he claimed was scamming customers. By June, he had recorded 179 “ask me anything” videos, most of which were about an hour long, according to the indictment.
Mr. Mashinsky’s pitch worked. As of 2021, New Jersey-based Celsius managed assets worth $20 billion.
But cracks appeared as the crypto industry began to falter in May. As Celsius grew in size, the lawsuit said, the company struggled to generate enough revenue to pay high returns.
“In search of income, Celsius moved into significantly riskier investments, extending hundreds of millions of dollars in unsecured loans and investing hundreds of millions of dollars in unregulated decentralized finance platforms,” the lawsuit said.
A portion of Celsius’ risky loans went to Alameda Research, the crypto hedge fund founded by Mr. Bankman-Fried. According to the lawsuit, Celsius lent approximately $1 billion to Alameda between 2020 and 2022. As collateral for the loans, Celsius accepted a crypto token invented by Mr. Bankman-Fried called FTT. The price of FTT plummeted this fall, contributing to the demise of Alameda and FTX.
By that time, Celsius was already in big trouble. The company collapsed in June and filed for bankruptcy the following month. After a brief attempt to revive the company, Mr. Mashinsky resigned in September. Now clients are rushing to recover what’s left of their savings and are looking for lawyers to represent them in the bankruptcy process.
