Celsius was one of the top lenders in the crypto ecosystem during the bull market in 2021. At its peak, it served 1.7 million customers and managed $25 billion in assets.
All that came crashing down in June 2022 amid major flaws in the company’s working structure.
The bear market in 2022, especially the Terra ecosystem implosion in May, exposed Celsius’ fragile business model, which was highly dependent on its native CEL (CEL) token and the high staking rewards it offered.
The price of CEL fell dramatically in June after the crypto lenders’ relationship with Terra became public, followed by Celsius sending huge amounts of funds off the platform and pausing user withdrawals.
Just a month later, on July 14, the troubled firm filed for Chapter 11 bankruptcy. At the time of the filing, it had roughly $2.7 billion in debt.
On June 16, 2022, securities regulators from five U.S. states opened an investigation into Celsius. The company’s former CEO, Alex Mashinsky, ultimately stepped down from his position on Sept. 27 amid rumors he was attempting to flee the United States.
By the end of 2022, the U.S. Justice Department, Commodity Futures Trading Commission (CFTC), Federal Trade Commission (FTC), and Securities and Exchange Commission had all begun investigating Celsius’ collapse and Mashinsky’s role in it.
Mashinsky faces criminal charges
The first significant blow for the troubled crypto lender came on July 5, 2023, when the CFTC concluded its investigation and alleged Celsius and Mashinsky had violated several U.S. regulations and misled investors.
On July 13, the SEC filed a complaint against Celsius and Mashinsky, accusing them of violating securities laws by raising billions of dollars through unregistered and fraudulent offers. The FTC also fined Celsius $4.7 billion and ceased its trading operations.
On the same day, the Justice Department charged the former CEO with “securities fraud, commodities fraud, and wire fraud for defrauding customers and misleading them about core aspects of the company he founded.”
Celsius’ former chief revenue officer, Roni Cohen-Pavon, and Mashinsky are “further charged with conspiracy, securities fraud, market manipulation, and wire fraud for illicitly manipulating the price of CEL, Celsius’s proprietary crypto token, all while secretly selling their own CEL tokens at artificially inflated prices.”
Damian Williams, the United States attorney for the Southern District of New York, said that his office is not seeking charges against Celsius, specifically, adding that it reached a non-prosecution agreement with the firm, as it “agreed to accept responsibility for its role in the fraudulent schemes” and is helping customers recover funds.
Mashinsky was arrested and released on a $40 million bond later the same day.
Ex-Celsius CEO Alex Mashinsky was arrested following a probe into the company’s collapse. The SEC sued both Mashinsky and the bankrupt crypto lender in New York court https://t.co/KgIYS487Zo
— Bloomberg Crypto (@crypto) July 14, 2023
With these charges and enforcement actions, Celsius and its former executives have joined the growing list of crypto firms to fall under the microscope of U.S. regulators in 2023.
A lawsuit against Binance accuses the exchange of offering unregistered securities and being mismanaged internally. Another against Coinbase alleges the exchange offered broker services for unregistered securities without a license.
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This slew of so-called “regulation through enforcement” has led many market pundits to argue that regulators need to be more clear in their approach to the crypto industry.
Mriganka Pattnaik, CEO of crypto compliance service provider Merkle Science, told Cointelegraph:
“The U.S. regulatory response remains uncertain, but the prosecution may have far-reaching implications for the cryptocurrency industry. The allegations of wire fraud, securities fraud and price manipulation raise concerns about similar activities in other crypto firms, potentially influencing regulators to heighten their oversight and enforcement efforts.
“Moving forward, the Celsius case will likely lead to more severe legal and financial consequences for noncompliant cryptocurrency firms,” she said.
Prosecution of bad actors is a boon for the crypto industry
Many crypto proponents believe the prosecution of Celsius’ former CEO could be good for the crypto industry. Punishing bad actors sends a clear message that fraud will not be tolerated, even if committed under the guise of a relatively unregulated industry.
Yamina Sara Chekroun, head of U.S. legal at Web3 payment infrastructure firm Ramp, told Cointelegraph, “Consumer-oriented actions by regulators should be applauded in light of the devastating losses users have suffered over the past two months as a result of mismanagement and the general lack of standardized requirements for risk disclosures. That being said, we should continue to honour due process, whether on Wall Street or in crypto.”
Kadan Stadelmann, chief technology officer of open-source blockchain tech provider Komodo, believes regulators will likely want to set an example with Celsius and other firms that allegedly broke the law, especially for those operating in the United States. However:
“The recent slew of crypto-related prosecutions will ultimately help the industry evolve to a point where users don’t have to worry about the safety of their crypto assets from potential human misuse or theft.”
Adam Ettinger, partner at the law firm FisherBroyles, told Cointelegraph that crypto lenders and fintech firms that defraud investors, lie about their financial products or manipulate markets should expect enforcement actions.
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“If the misconduct is egregious enough, executives may face criminal charges and arrest. My hope is that fewer crypto companies will ‘face the heat’ because the bad actors have already either departed or perished, and those that might have considered fraud will take notice of the enforcement activity and fly right,” he added.
Most of the litigation against accused bad actors has come after ecosystem implosions and losses, which have proven disastrous for many consumers and cast a shadow of doubt on the entire ecosystem. Thus, regulators’ actions against such bad actors often become the last hope for investors and consumers to get some of their funds back.
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