February 21, 2024

On Thursday, New York Attorney General Letitia James prosecute The founder of collapsed cryptocurrency bank Celsius Network has accused him of orchestrating a scheme to defraud hundreds of thousands of investors.

The lawsuit stems from the implosion of Celsius this summer, when the company filed for bankruptcy and its customers lost billions in deposits. The suit alleges that Celsius founder Alex Mashinsky, 57, misled customers for years into depositing their crypto savings with the platform, promising it was as safe as a traditional bank. The lawsuit seeks to bar him from doing business in New York and force him to pay damages.

“When Celsius incurred losses in its venture capital investments, Mashinsky failed to disclose those losses to investors,” the lawsuit says. “The collapse of Celsius has left many in a situation of hopelessness and economic collapse.”

In a statement, a Celsius spokesman said Mr Mashinsky was no longer involved in the management of the company. Mr. Mashinski did not respond to a request for comment.

The lawsuit is the latest aggressive government response to risky behavior and widespread fraud that will plunge the cryptocurrency industry into crisis in 2022. Last month, U.S. prosecutors charged Sam Bankman-Fried, the founder of defunct cryptocurrency exchange FTX, with widespread fraud. Mr. Bankman-Fried also faces civil charges from the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission.

On Wednesday, the U.S. Securities and Exchange Commission also push Backing a plan by the U.S. arm of major cryptocurrency exchange Binance to acquire Voyager Digital, a cryptocurrency lending business similar to Celsius, failed around the same time.

Celsius’ failure was arguably the worst moment in crypto’s disastrous 2022, before FTX declared bankruptcy in November. For years, Mr. Mashinsky has promoted the company with a marketing promise that’s too good to be true: interest rates as high as 17 percent on cryptocurrency deposits.

As the industry flourished, he became one of the most successful and charismatic salesmen. He often appears in YouTube videos promoting Celsius as a populist and egalitarian alternative to the traditional banking system, which he says is exploiting customers. As of last June, he had recorded 179 “what’s wrong” videos, most of which were about an hour long, the lawsuit said.

Mr Mashinski’s pitch worked. In 2021, New Jersey-based Celsius manages $20 billion worth of assets.

But as the crypto industry began to falter in May, cracks emerged. As Celsius got bigger, the lawsuit said, the company struggled to generate enough revenue to pay the high yield.

“In pursuit of income, Celsius made significantly riskier investments, extended hundreds of millions of dollars in unsecured loans, and invested hundreds of millions of dollars in unregulated decentralized financial platforms,” the lawsuit said.

Some of Celsius’ venture loans went to Alameda Research, a crypto hedge fund founded by Mr. Bankman-Fried. Between 2020 and 2022, Celsius lent Alameda approximately $1 billion, the lawsuit said. As collateral for the loan, Celsius accepted a cryptographic token invented by Mr. Bankman-Fried called FTT. The price of FTT plummeted this fall, leading to the downfall of Alameda and FTX.

By then, Celsius was in deep trouble. The company collapsed in June and filed for bankruptcy the following month. Mr Mashinski resigned in September after a brief attempt to revive the company. Now, clients are scrambling to get their remaining savings back, hiring lawyers to represent them in bankruptcy proceedings.

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