One of Celsius’ Old Partners Calls Crypto Exchange ‘Ponzi Scheme’ in New Suit

The after shakes of the recent crypto earthquake have brought down the roofs of several crypto lenders and exchanges, and some of those who once happily played in the crypto sandbox with the big players are now racing to sue before all the money is shaken out of their pockets.

KeyFi Inc., which once operated as an asset manager for the crypto exchange Celsius, turned around and sued their former partner in New York State supreme court Thursday, arguing that the broker had been operating a “ponzi scheme.” The company, which used crypto addresses including the famed Oxb1 account, managed hundreds of millions of dollars in customer deposits for the purpose of investing. Now the company said their former partner was in breach of contract and had committed fraud.

In the lawsuit, KeyFi argued that Celsius had no real investment strategy “other than lending out consumer deposits they received.”

“As customers sought to withdraw their ether deposits, Celsius was forced to buy ether in the open market at historically high prices, suffering heavy losses,” according to the suit. “Faced with a liquidity crisis, Celsius began to offer double-digit interest rates in order to lure new depositors, whose funds were used to repay earlier depositors and creditors. Thus, while Celsius continued to market itself as a transparent and well capitalized business, in reality, it had become a Ponzi scheme.”

That was until mid-June when Celsius announced they were halting all withdrawals “due to extreme market conditions.” The company said at the time that closing off users’ access to their assets was an effort to “put Celsius in a better position to honor, over time, its withdrawal obligations.”

“The recent revelation that Celsius does not have the assets on hand to meet its withdrawal obligations shows that defendants were, in fact, operating a Ponzi-scheme,” KeyFi wrote in its lawsuit. Celsius once promised its customers returns as high as 19%, according to Reuters.

Celsius did not immediately return Gizmodo’s request for comment.

In a Twitter thread, Jason Stone, the CEO of KeyFi who said he managed the Oxb1 address, railed against his former partner. The Financial Times reported that Oxb1 was an ethereum wallet that once counted as the third-biggest crypto whale on the ether network. Stone wrote his company was handling Celsius’ users’ investments in a kind of yield farming operation, namely depositing tokens for interest.

In the suit, KeyFi said they generated $838 million in profit for Celsius before costs between August 2020 and March 2021, where KeyFi netted a 20% profit. The suit further alleged that Celsius CEO Alex Mashinsky used control of the KeyFi’s old wallet to transfer NFTs from the company account to the wallet of his wife, Krissy Mashinsky.

Stone further wrote on Twitter that by the time his company and Celsius split ways, his team was managing “nearly $2 billion of assets.” Stone goes on to say that any risk management that Celsius claimed it had to monitor any loss in liquidity pools was a lie. He claimed that in late February of 2021 Celsius had not been hedging against any of Keyfi’s investments or for any of the rapid fluctuations of crypto.

Stone said that shortly after that revelation the company looked to unwind themselves from Celcius’ positions, but then the crypto exchange “suffered impermanent loss” and accused Keyfi of stealing from them.

There’s a debt crisis looming like a massive shadow across the entire breadth of the crypto lending game, at least that’s how an uncredited report from the crypto research group Arkham Intelligence released Friday put it as it detailed what happened with Celsius. In the end, it doesn’t show either of these companies on opposite sides of the lawsuit in any positive light.

The report only adds more fuel to the fire, saying that Oxb1 lost “$61 million of what appears to be Celsius money in liquidations.” Though authors said the Oxb1 account “returned the majority of funds back to Celsius… had Celsius held these assets instead of sending them to Oxb1, their value would have been $1.49 billion — over $350 million more than what Oxb1 appears to have returned.”

In a short phone interview, Miguel Morel, the company’s CEO, said they have not yet heard back from either company disputing the claims or data in the report. Though the document was released just one day after the lawsuit dropped, Morel said they had planned on releasing this report now, and they first learned of the lawsuit yesterday “when everybody else did.”

The report also re-alleges that NFTs were transferred out of the Oxb1 account to the business address of Mashinsky’s wife. Arkham ends their report with comments from Celsius users on Reddit who described losing their life savings and struggling to deal with panic attacks after hearing the news Celsius had canceled withdrawals.

“It appears some people, following Celsius and Mashinsky’s advice to “Unbank Yourself,” deposited practically everything they had onto Celsius,” the report said.