Crypto Lender Celsius Faces Lawsuit for Running Ponzi Scheme, FDIC Investigates Voyager Digital

Cryptocurrency market lenders are having a real tough time amid the current market turmoil. Embattled crypto lender Celsius Networks is facing a fresh lawsuit that accuses it of engaging in fraudulent activities, artificially inflating the price of its digital tokens, and failing to hedge risks.

Jason Stone, a former investment manager at Celsius and currently the founder of KeyFi, has accused Celsius of running a Ponzi scheme. In the lawsuit, he also noted that Celsius owns KeyFi millions of dollars pursuant to a profit-sharing agreement” between the two companies.

Celsius has been undergoing a major liquidity crisis as the crypto lender paused withdrawals last month. Celsius Networks functions as a bank and offered customers yields as high as 19% over their crypto deposits.

In the lawsuit, Jason Stone noted that Celsius and KeyFi has a deal whereby the latter firm would manage billions of dollars in customer crypto-deposits in return for a share of the profits generated from those crypto-deposits”. However, the lawsuit notes that there was “no formal written agreement between the parties”.

Back in August 2020, Celsius started transferring millions of dollars in crypto assets to KeyFi. Later, Celsius also set up an wallet on the Ethereum blockchain called 0xb1”.

The lawsuit further puts a number of allegations against Celsius. One of the allegations is around Celsius’ own digital coin CEL. Celsius said that if the users accept their interest payments in CEL, they could earn higher interest. The lawsuit says that Celsius engaged in transactions that would artificially inflate its price.

Stone said: The purpose of this scheme was both fraudulent and illegal: Celsius induced customers to be paid in CEL tokens by providing them with higher interest rates. Then by purposefully and artificially inflating the price of the CEL token, Celsius was able pay customers who had elected to receive their interest payments in the form of the CEL token even less of the crypto-asset.

The KeyFi founder also said that Celsius CEO Alex Mashinsky was able to enrich himself considerably.”

Furthermore, Jason Stone argues that Celsius failed to ensure necessary hedges against its risk bets. As a result, Celsius had massive “liabilities” to depositors denominated in the cryptocurrency ether. But Celsius failed to maintain equivalent cash holdings and as the ETH price collapse, it faced major liquidity crunch.

If Stone is able to prove his allegations in the court, Celsius could be facing huge penalty. However, in another news, Celsius has paid back outs $41 million debt to MakerDAO.

In other news, the Federal Deposit Insurance Corporation has initiated fresh investigation into how bankrupt crypto broker Voyager Digital marketed its products to the customers. This happens as Voyager claimed that the U.S. Dollars deposited with the firm are covered by FDIC insurance owing to its partnership with Metropolitan Commercial Bank.

However, Metropolitan Commercial Bank recently issued a statement informing the customers of Voyager Digital that the FDIC insurance would only hold true of the bank itself failed and not upon Voyager’s failure.