Raphael Stevens

Celsius had a range of internal failures during the years leading up to its recent liquidity issues, according to former employees and internal documents reviewed by CNBC.
Employees who spoke with CNBC painted a picture of risk-taking, disorganization and alleged market manipulation.
“The biggest issue was a failure of risk management,” said one former employee.

Problems at Celsius appear to have been simmering for years before the crypto lender filed for bankruptcy.
The crypto company saw a range of internal missteps leading up to its recent turmoil, according to former employees and internal documents CNBC reviewed. Multiple employees painted a picture of risk-taking, disorganization and alleged market manipulation.

“The biggest issue was a failure of risk management,” Timothy Cradle, Celsius’ former director of financial crimes compliance, told CNBC in an interview. “I think Celsius had a good idea, they were providing a service that people really needed, but they weren’t managing risk very well.”
The Hoboken, New Jersey-based company made headlines a month ago after it froze customer accounts, blaming “extreme market conditions.” It had attracted 1.7 million customers and $11.8 billion in deposits as of June. Celsius customers have told CNBC they were drawn in by a 17% yield the company was offering on crypto deposits.
Behind the scenes, Celsius would lend that money out to hedge funds and others willing to pay an even higher yield. It would also invest in other high-risk cryptocurrency projects, according to internal documents. Celsius would later split those profits with the customer. The model came crashing down along with the price of cryptocurrencies, which caused multiple companies to freeze assets and at least three to file for bankruptcy.
Cradle said he was part of a three-person compliance team between 2019 and 2021. The role required him to apply international finance laws to Celsius’ business. But resources were limited, he said.
“The compliance team was too small,” Cradle said. “Compliance was a cost center — basically we were sucking out money and not bringing any back in. They didn’t want to spend on compliance.”

One of the internal company documents CNBC obtained echoed this claim. It said when it came to assessing fraudulent cryptocurrency platforms, “there is not adequate compliance staff for the amount of users on Celsius’s platform as there are only 3 full-time individuals.”

‘Banks are not your friends’

Cradle said he was especially alarmed by conversations at a Celsius Christmas party in 2019 about a cryptocurrency created and used by Celsius, called the “cel” token. Executives said they were “pumping up the cel token” and “actively trading and increasing the price of the token,” Cradle said.
“They weren’t shy about it. They were absolutely trading the token to manipulate the price,” Cradle said. “It came up in two completely different conversations for two completely different reasons.”
Celsius, CEO Alex Mashinsky and company lawyers did not respond to multiple requests for comment.

Celsius on Thursday was sued by former investment manager Jason Stone, as pressure continues to mount on the firm amid a crash in cryptocurrency prices. Stone has alleged, among other things, that Celsius CEO Alex Mashinsky (above) was “able to enrich himself considerably.”
Piaras Ó Mídheach | Sportsfile for Web Summit | Getty Images

Celsius was by far the largest holder of cel tokens. But it was also a buyer, according to blockchain data firm Arkham. The firm estimated that Celsius spent $350 million acquiring tokens on exchanges over the past three years, despite already having billions worth in its own treasury. At the same time, top executives were selling. Accounts associated with Alex Mashinsky appear to have sold or “swapped” roughly $40 million, according to Arkham.
Cradle and other employees received part of their salary in cel tokens. A former human resources employee said it was a way to attract and retain talent. It also let them share in the company’s financial upside — similar to the appeal of equity in a fast-growing start-up. The token started to spike in early 2020 and the following year hit a high of almost $8. It was trading under $1 as of July.
Celsius’ CEO was an outspoken booster of the token. He gave weekly YouTube updates often touting the benefits or “tokenomics” of the project. Mashinsky was also known to criticize Wall Street banks. He frequently wore a black T-shirt during public appearances that said: “Banks are not your friends.”
Another former Celsius employee, who asked not to be named, said while Mashinsky was inducing average investors to buy the cryptocurrency, he was selling behind the scenes.
It wouldn’t take much to move the price of the token because the volume was relatively small, the former employee said. Mashinsky was selling millions behind closed doors without any public disclosures, according to the former employee.
“It’s easy to manipulate the price of cel due to the low trading volumes in cel. I’m sure [Mashinsky] knows that,” the former employee said. “That’s just an example of what he will do to publicly manipulate the price for his own benefit.”
The former employee’s allegations echo a recent lawsuit brought by a former investment manager, Jason Stone. Stone alleges that Celsius artificially inflated the price of its own token and was “actively using customer funds to manipulate crypto-asset markets to their benefit.” The suit also claimed Celsius failed to hedge risk and engaged in activities that amounted to fraud.

Details within internal documents

Other internal documents shine light on some of the risk Celsius appeared to be taking with customer funds. Lenders such as Celsius and hedge funds were able to achieve high returns by investing in “decentralized finance,” or DeFi, projects. Celsius has its own cryptocurrency and relied on high yields to attract more borrowers. According to internal documents, Celsius was investing customer funds in multiple DeFi projects. All were labeled medium to high risk.
On Wednesday, Vermont became the sixth state regulator to launch an investigation into Celsius and pointed to that investment strategy. The state’s Department of Financial Regulation said Celsius “deployed customer assets in a variety of risky and illiquid investments, trading, and lending activities.”
“Celsius customers did not receive critical disclosures about its financial condition, investing activities, risk factors, and ability to repay its obligations to depositors and other creditors,” the Vermont regulator said in a statement.
Cradle also said that many Celsius users likely didn’t have a good grasp of the company’s terms of use, which contradicted the messaging that Celsius communicated through its marketing.
But the risks associating with depositing funds with Celsius were “hiding in plain sight,” Cradle said. Section 13 of the company’s terms of use says that once a customer deposits funds, the funds belong to Celsius.
Cradle also said he saw evidence of the company trading customer funds without disclosing that it was doing so. Celsius’ CEO has said explicitly on Twitter that the company did not trade customer funds.

Arrows pointing outwards

Cradle said that based on his firsthand experience with the company’s risk appetite he wouldn’t keep his own money with Celsius.
“I didn’t feel comfortable leaving them on the platform,” Cradle said, referring to his own crypto funds. “I frequently read the terms of use — once you deposit your assets with Celsius, they belong to Celsius, and Celsius can keep them if they need to or want to.”
Internal documents also show evidence of disorganization across multiple teams. One document shows policies written by a team without the head of that team knowing. In one instance, a top risk officer writes that he was “surprised” by a document written by another team overseas.
“He was probably surprised that the document even existed — that’s just the way things were at Celsius. It’s left hand not knowing what the right hand is doing,” Cradle said. “It’s just another example of mismanagement or sort of sloppy management on Celsius’ part.”

Lacking transparency

One area in which Cradle said Celsius lacked transparency was its number of accounts. While Celsius reported 1.7 million users, Cradle said that number is inflated.
“It’s probably closer to 300,000, because the amount of fake accounts was so vast and there was nothing the management team was willing to do to really stop people from doing that,” he said.
In addition to this alleged discrepancy, Mashinsky’s own Twitter posts show a contrast between the messages he conveyed to customers and what was transpiring behind the scenes.
The day before the withdrawal freeze, in response to a tweet that questioned the company’s financial health, Mashinsky wrote: “do you even know one person who has a problem withdrawing from Celsius? why spread FUD and misinformation,” referring to fear, uncertainty and doubt. The following day, June 12, customers were no longer permitted to withdraw funds from their accounts.
Public records indicate Celsius may have had financial problems long before this.
Data from the federal government shows Celsius received a Paycheck Protection Program loan worth $281,502 in April 2020. The federal government awarded these loans to businesses negatively affected by the Covid pandemic.  
“That raised my eyebrows a bit, and I was curious if we were profitable,” Cradle said.
The loan was forgiven by the federal government, meaning that Celsius met the requirements needed to avoid repayment.

Background checks

Risk-taking also showed up in the Celsius hiring process. Nikki Goodstein, a former senior member of the human resources team, said she was not aware of any background checks at the company when she joined in May 2021.
She told CNBC that executives specifically told the chief human resources officer not to run a background check on Yaron Shalem, the incoming chief financial officer. In November 2021, Shalem was arrested in Israel and charged with money laundering in connection with his previous company. Shalem did not respond to requests for comment.
CNBC also made an attempt to find out the status of the case, but it does not appear to be publicly available in the Israeli court system. The chief human resources officer who Goodstein said was told not to run a background check did not respond to CNBC’s request for comment.
Goodstein, who worked at publicly traded Fortune 500 companies before Celsius, said she was “surprised” someone in an executive role wouldn’t face a background check.
“It was definitely a gap in process at that time,” she said. “Everyone was [upset] that he wasn’t background checked, because then it wouldn’t have brought such embarrassment to the company if that was a process that we had in place — we all were kind of like, what the heck just happened?”
Cradle said he’s not planning to go back to the cryptocurrency industry after Celsius and a stint at another start-up. Celsius set out to make a good product at a time when banks paid near zero interest on savings, he said.
“I think it was good people with poor planning — they didn’t hire at the right times, they didn’t staff up at the right times, they didn’t scale with the growth of the company,” he said. “It was just a bunch of mistakes that are ending up very tragically.”
— Érica Carnevalli and Margaret Fleming contributed to this article.

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Crypto platforms Celsius and Voyager filed for bankruptcy protection after suspending account withdrawals.
The debacle raises questions about what happens to investors’ funds when an exchange ends up failing.
Traders hoping to recoup some or all of their holdings anytime soon are likely to end up disappointed, according to legal experts.

Bankruptcy filings from Celsius and Voyager have raised questions about what happens to investors’ crypto when a platform fails.
Rafael Henrique | Sopa Images | Lightrocket | Getty Images

Traders hoping to recoup their funds from failed cryptocurrency exchanges anytime soon are likely to end up disappointed, legal experts tell CNBC.
Crypto trading and lending firms Celsius and Voyager Digital filed for bankruptcy this month, leaving users’ assets trapped inside their platforms. Both firms froze client accounts after an influx of withdrawals led to liquidity issues.

Celsius operated much like a bank, taking customer deposits and lending them out or making risky gambles on so-called decentralized finance products to generate high yields.
Voyager had a similar model. The company got caught up in the collapse of high-profile crypto hedge fund Three Arrows Capital, which itself went belly up after defaulting on a $660 million loan from Voyager.
Such interconnectedness has left the crypto market vulnerable to contagion, with major firms falling like dominoes as a plunge in token prices has unwound excessive leverage in the system.

Is my crypto safe?

Cryptocurrencies aren’t regulated, meaning they don’t offer people the same protections they would get with money held in a bank or shares in a brokerage firm.
For example, the U.S. Securities Investor Protection Corporation insures traders up to $500,000 in cash and securities if a member broker runs into financial difficulties.

The Federal Deposit Insurance Corporation, meanwhile, offers bank depositors protection of up to $250,000 if an insured lender fails.
There are similar schemes in place in the U.K. and European Union.
With no laws governing cryptoassets, there’s no guarantee investors would be able to recoup their funds if an exchange were to freeze someone’s account — or, worse yet, completely collapse.

“There isn’t such a scheme like that at this point” for crypto, said Daniel Besikof, partner at Loeb & Loeb. 
“It wouldn’t surprise me if one happens down the line,” he added. “This will ramp up calls for enhanced regulation.”

What happens if an exchange fails?

For now, it’s still not entirely clear. While there are examples of crypto firms filing for bankruptcy overseas — Mt. Gox in Japan, for example — such an event is unprecedented in the U.S.
Creditors of Mt. Gox, which went offline in 2014, are still waiting to get repaid billions of dollars’ worth of the cryptocurrency.
The problem with centralized crypto platforms is they can mix different clients’ funds together to make risky bets, according to Daniel Saval, a lawyer with Kobre & Kim. Such commingling may lead to a ruling that the assets are the property of the exchange, not users.
“Users may be surprised to learn that, in a bankruptcy scenario, the crypto and funds held in their accounts may not be considered their own property,” Saval says.
“Exchanges will often pool different customers’ crypto and funds together in the same storage wallet or account.”

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What happens to customers’ funds in bankruptcy cases will depend a lot on the company’s user agreement and how it used their assets, Besikof said.
Celsius’ terms of use state that any funds deposited with the firm “may not be recoverable” in the event of bankruptcy. The firm filed for Chapter 11 protection last week, revealing a $1.2 billion hole in its balance sheet and owing users around $4.7 billion.
Celsius claims to have $167 million in cash on hand. But it’s still not letting customers withdraw their funds, and hasn’t offered clarity on when it will reopen withdrawals.
Voyager says its customers’ dollars are kept in an FDIC-insured account at Metropolitan Commercial Bank in New York — however, this claim was contested by legal experts and the bank itself. The FDIC only offers protection of funds in the event of a bank’s failure, not a crypto exchange.
For its part, Voyager says it’s working through a “reconciliation and fraud prevention process” with its banking partner, after which users will be able to regain access to their cash.
Voyager also laid out a plan to reimburse users with crypto in their accounts, Voyager shares and the company’s own token, as well as any debt recovered from Three Arrows Capital.
Both Celsius and Voyager hired Kirkland & Ellis, the prestigious law firm, to represent them in court.
“Investors holding crypto assets through Voyager Digital and now Celsius have been placed in a difficult position, with their accounts frozen, their lawsuits stayed and the value and timing of any recoveries unknown,” Besikof said.
“There is a lot of work for them to do in bankruptcy court before these issues will be resolved.”
Celsius and Voyager filed for what’s known as Chapter 11, a form of bankruptcy protection that allows firms to restructure their debts. The aim is to ensure there’s still a viable business by the end of the process.
There’s a strong likelihood that Celsius and Voyager’s users will be treated as “unsecured creditors,” legal experts said, a categorization that puts them in the same bucket as a business’ suppliers and contractors.

This means they would likely be at the back of a long queue of creditors lining up for a payout from the court proceedings — behind banks, employees and tax authorities.
In a May regulatory filing, Coinbase said its users would be treated as “general unsecured creditors” in the event of bankruptcy.
“In general, most customers in cryptocurrency exchanges are unsecured creditors, so when an exchange collapses, secured creditors are paid back first, along with legal fees,” said Dustin Palmer, managing director at consulting firm Berkeley Research Group. “Customers will be paid last on a pro rata basis. In a typical bankruptcy, this is pennies on the dollar.”
“Customers will likely have to wait until the full bankruptcy process is complete before receiving remuneration, and bankruptcy usually lasts years,” Palmer added. “Lehman took years. Some Mt. Gox customers, for example, still haven’t received any remuneration.”
Saval added customer recoveries in bankruptcy proceedings “may be further diluted by other unsecured creditors such as vendors, lessors and litigation claimants.”

How can I protect my crypto?

Investors can opt to move their crypto off an exchange into so-called “self-custody” wallets instead.
This is where someone is responsible for their own private key, a secret password required for gaining access to a crypto wallet.
Such a move comes with its own risks, however. If a crypto holder loses their private key, they may never be able to recover their funds.
There have been countless examples of people who’ve lost hard drives or USB sticks containing troves of crypto worth millions.

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SoftBank has stopped working on a London initial public offering for chip designer Arm because of political upheaval in the U.K., the Financial Times reported.
U.K. Prime Minister Boris Johnson resigned as leader of the Conservative Party earlier this month, and ministers who the FT said had important roles in discussions with SoftBank have also stepped down.
SoftBank founder Masayoshi Son previously said Arm was most likely to list on the Nasdaq in the U.S., but warned the decision was not final.

SoftBank has stopped working on a London initial public offering for chip designer Arm because of political upheaval in the British government, the Financial Times reported.
Akio Kon | Bloomberg | Getty Images

SoftBank has stopped working on a London initial public offering for chip designer Arm because of political upheaval in the British government, the Financial Times reported.
U.K. Prime Minister Boris Johnson resigned as leader of the Conservative Party earlier this month, and ministers who the FT said had important roles in discussions with SoftBank have also stepped down.

That has led to SoftBank putting talks on hold, the report said, citing people briefed on the matter.
SoftBank founder Masayoshi Son previously said Arm was most likely to list on the Nasdaq in the U.S., but warned the decision was not final.
The FT reported SoftBank was considering a dual primary listing in New York and London.

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