The problems at crypto lender Celsius seem to have been going on for years before finally culminating in the firm’s recent bankruptcy filing. Meanwhile, the company’s lawyers are arguing that its users gave up the rights to the cryptocurrency they deposited on its platform, meaning that it is “entitled to use, sell, pledge and rehypothecate those coins.”
Long-Running Problems At Celsius
Former Celsius employees told CNBC that the company has seen multiple internal missteps that led up to its recent bankruptcy filing. The news outlet also reviewed internal documents that backed up those claims. It added that multiple employees “painted a picture of risk-taking, disorganization and alleged market manipulation.”
Celsius' former director of financial crimes compliance told CNBC that the company's biggest issue was a "failure of risk management." Timothy Cradle added that he thinks the crypto lender had a good idea and provided a much-needed service but wasn't managing risk very well.
A month ago, Celsius froze its customers' accounts, citing "extreme market conditions." The company reported having 1.7 million customers and $11.8 billion in deposits as of last month. It attracted customers with a 17% yield on their crypto deposits, which it then loaned out to others willing to pay exorbitant interest rates to borrow cryptocurrency.
Compliance Problems Reported
According to internal documents reviewed by CNBC, Celsius also used customer deposits to invest in other high-risk crypto projects, splitting the profits from then with its customers. However, when crypto prices crashed, the company's business model also collapsed, causing multiple crypto-related companies to freeze assets and triggering at least three bankruptcy filings.
Cradle told CNBC that he worked as part of a three-person compliance team at Celsius from 2019 to 2021. In that role, he applied international finance laws to the company's business, although he added that his resources were limited. Cradle said the compliance team was too small and that Celsius didn't want to spend any money on compliance because the division didn't bring any money in.
He was particularly concerned about conversations at the company's Christmas party in 2019. Celsius executives reportedly said they were "pumping up the cel token," which was the cryptocurrency created and used by Celsius. They also reportedly said they were "actively trading and increasing the price of the token."
Celsius Users Gave Up The Rights To Their Crypto?
The lawyers explained how retail users of Earn and Borrow transferred the title of their cryptocurrency to the firm as part of its terms of service. As a result, they claim Celsius is free to "use, sell, pledge and rehypothecate those coins" as it sees fit.
However, Cointelegraph noted that a question about whether Custody account holders actually retain the title for their assets. According to Celsius' terms of service, it cannot use coins in Custody accounts without obtaining permission from those users. Nonetheless, the company's attorneys questioned whether that holds true for the cryptocurrency it currently possesses.
The company launched its Custody program in April to serve non-accredited investors in the U.S. after some states issued cease and desist orders on its Earn program.