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Israeli Crypto Firm Celsius Network Sued – Accused of Bean a Ponzi Scheme

Celsius Network, an Israeli fintech startup and unicorn working in the crypto industry is being sued by someone who accused the firm of having run a Ponzi scheme.

Jason Stone, who managed the KeyFi Inc investment fund together with Celsius Network, filed the lawsuit that accused the company of having defrauded him and of the “gross mismanagement of customer deposits.” Stone further alleges in his suit that he provided the company with services worth millions of dollars that it never paid out.

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Co-founded in 2017 by Israeli Daniel Leon, President and COO of Celsius, CEO Alex Mashinsky, and CTO Nuke Goldstein, just last October Celsius Network hit a $3 billion valuation when it raised $400 million in new capital. But the company may have just been another house of cards as many in the crypto industry proved to be when the entire crypto market crashed recently.

Celsius Networks boasts over 1 million users that the company says earn up to 17% yield on their crypto investments. Celsius says that users get paid new coins every week and borrow cash at 1%, while allowing people to borrow, and transfer with no fees. The company declares that its platform offers services that have been abandoned by traditional banks. These include “fair” interest, no fees, and speedy transactions.

And this is where the problem lies.

Cryptocurrencies in general proved to be somewhat of a Ponzi scheme overall as the biggest investors pulled out with their money, thereby causing the crash that left countless people around the world losing a fortune on the cryptos that they continued to hold.

But Celsius Network was not just another crypto exchange/wallet service. It provided financial services whereby people could leverage their crypto investments for the cash needed for other projects. Basically, Celsius gave people a very high interest on their cryptocurrencies to bank with the company while then lending out the cryptos to investors at a much higher rate.

This system might just have worked had the market not crashed. But as what happened to Bernie Madoff when the markets crashed back in 2008, so too a number of firms dealing in crypto were revealed to be nothing but houses of cards when the market crashed.

And the biggest problem here is that Celsius Network had its own crypto currency that it promoted. So this, in many ways, echoes what happened at the major Wall Street financial firms like Lehman Brothers who mixed brokerage services with investments of their own. Those firms went under because they could not pay off the money owed on their sub-prime mortgage investments. Celsius suspended all payments in June because it could no longer pay off its investors.

The people who deposited their cryptos were supposed to be able to cash out when needed just like removing money from a bank, even if this meant losing some of the interest gained. But with the crash of the crypto market too many people all at once wanted to get back their currencies to dump for cash and Celsius Network simply did not have the cryptos on hand to give back.

According to the lawsuit, Celsius Network also allegedly overvalued its liquid assets by listing in cash the US Dollar value of cryptos that it held, even as the market value dropped. This means that, if true, the company could have continued to show liquidity far beyond what it actually held until it was finally forced to suspend operations.

So, Stone alleges that the company continued to promise him that it had the money to pay him what was owed, but never did. “But these promises were lies,” says his suit. “Despite its repeated assurances, Celsius failed to implement basic risk management strategies to protect against the risks of price fluctuation that were inherent in many of the deployed investment strategies.

Stone further alleges there were “multiple incidents” in which he accuses Celsius Network of “failure to perform basic accounting endangered customer funds.”

The underlying problem here for anyone involved in cryptos is that the field is not fully regulated by government agencies like the stock markets around the world. Nor do cryptos have any tangible value. Many who had been saying this all along – like Warren Buffet – are likely to say I told you so.

And this will also make it harder for investors to win such lawsuits. The lack of regulations and oversight by government bodies like the SEC coupled with the lack of any real value for what are in effect virtual currencies will all be mitigating factors in determining any culpability on the part of people who ran firms like Celsius.



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