A Look Behind The Celsius Curtain

Celsius's charismatic CEO, Alex Mushinsky. Mushinski would say that these investors were making smart, low risk financial decisions by trusting their digital tokens to the company, But the reality of what was happening behind the scenes, according to a recent report from an independence examiner, sounds like it was very different. According to the allegations and report, the risk controls at Celsius were much less thorough and much less sophisticated than

what they were telling their customers at the time. That report clocks in at six hundred and eighty nine pages, so there's a lot in there, But fundamentally, it alleges that Celsius misrepresented the true financial health of the company in ways that turned out to have devastating consequences for those customers who trusted them. Bloomberg's Olga Kreife has read many hundreds of those pages, and she joins me now with the details. Olga, welcome back to the show. Thank

you for having me today. We are not going to talk about that's a big change, that's huge. I know it's a surprise, But we are going to talk about a company that I think, in a lot of ways is equally important to understanding what's been happening in crypto, and that company is Celsius. I and again reminding all others nerves, this is a theoretical example. I do not personally own a bunch of crypto. I do not own

any crypto. But if I did own a bunch of crypto, I could have gone to Celsius, would say ten thousand dollars worth of bitcoin, for example, and then said, okay, Celsius, I'm gonna let you take this money and lend it out to other people, and you will pay me some kind of really high interest rate in return. Is that correct? That's exactly right. And you know, for years Alexandmaschinsky, CEO of Celsius, he basically said that, you know, if you put your money in a bank. You're basically going to

get this tiny little interest if any. But you know, it's a smart financial move for you to come to Celsius and actually earn and much higher yield with you know, he said low risk. If I wanted to borrow money from Celsius, what would I do? So you would come to Celsius, And it depended on who you were. Basically, sometimes people had to put up collateral to borrow from Celsius, but sometimes, as we found out more recently, they didn't have to put up collateral, or not as much collateral.

As you know, some customers who kept their funds on Celsius thought they needed to put up And so that brings us to this Examiner report that came out in January that sort of uncovered that there were a lot of discrepancies in between institutional for instance, and retail borers

at Celsius. So when we talk about collateral, because I think this is a really important point and you know, it gets to the heart of as you say, this report that was published just recently, when you talk about collateral in a traditional loan context, that's like, if I want to borrow money to buy a house, I have to pledge some kind of asset in return. That might be a down payment, that might be some other asset

that I have. But if I were very wealthy and I owned, say, you know, millions and millions of dollars worth of shares, I could pledge those shares as collateral if I wanted to borrow money to do something else like build a spaceship or whatever it is that really wealthy people do with their billions of dollars. But the idea is that in the case that I didn't pay my loan back, the bank or the person who let me money would have a way to at least cover

the losses. Is that roughly how that works. Absolutely, and it worked very differently on Celsius. Let me give you one example. So, for instance, FTX, they change that when bankrupt last November, would borrow coins from Celsius and it would put up its own FTT token, which FTX is

should as collateral. Now we know because FTX collapsed in November that you know, the value FTT tokens was very questionable, and actually people inside of Celsius knew that as well, that it was questionable and probably you know, should not be accepted as collateral, but it was still accepted as collateral. So those are the type of transactions that Celsius had facilitated. When I was reading the Examiner report, like one of the things that really jumped out to me was this

idea that this wasn't something that happened recently. It's not that these standards only eroded in twenty twenty one or twenty twenty two before they filed for bankruptcy. It sounded like there had been a real pattern of having less than robust risk management for a much longer time. Absolutely so machine Ski and his co founder they came up with the idea for Celsius in twenty seventeen, and this

company was the service was launched in twenty eighteen. And actually some risk control policies well they were not even imposed, they were just there was I think more of a pretense of imposing risk controls. But that only started in twenty twenty one, according to the Examiner report. And so one thing that they examined a highlighted throughout this, you know, almost seven hundred page report, is that this company they had trouble with accounting, they had trouble with pain taxes,

they had trouble with risk controls. I mean they used quick books and Google spreadsheets to keep track of the coins that were you know, lent and borrowed. And obviously quick books is for small to mid sized businesses, and you know, right, everyone's apparently exactly and the examiner couldn't even find a lot of the older record keeping. It

does not exist, apparently. And the risk controlled policies, you know, when when internal people were suggesting some of this risk control measures which are pretty standard that were not implemented. A lot of them were sort of not implemented even after the suggestions have been made and issues have been raised. You know, Alex Maschinski, according to the examiner's report, was very focused on pretty much just growing the user base

of Celsius and not on anything. Well, how does that contrast with what Maschinsky was telling customers at the time. So at the time and actually, you know, up until self is froze withdrawals on June twelfth of last year, essentially machine Ski was telling everybody we have enough funds, we have all the funds we need to reimburse everybody. You know, everything is fine. And for actually several months before then, things actually for many months before then, things

were not fine. Celsius was recording massive losses. It was spending customer and investor money to prop up its own cell token. And when things went south last May, when the Terra blockchain collapsed, this was sort of just the last nail in the coffin. But Celsius filed for bankruptcy with a hole in its balance sheet of more than a billion dollars. But you know, a lot of this whole actually happened way earlier than May. Everything that could

have gone wrong with this business pretty much. Did you know, they borrowed money from a lender and then the lender refused to give them their collateral back, for example, or they entrusted their you know, thousands of ether too, somebody who lost access to that ether. You know, all kinds of strange things happened in this business. And I think partially this goes back to what you said, you know, the lack of risk controls and the business wasn't managed well.

Now you've been a reporter for a long time, I feel like you've heard people say this before. But yeah, this time, for sure, we're going to pay attention to the fundamentals. We're not going to just try to chase after the thing that everybody's chasing at. We're not going to overpay for deals. We're going to be really thoughtful and deliberate and really care about risk. And then like

three years later everything blows up again. Oh absolutely. I mean we saw this with initial coin offerings, where vcs were front and center in a lot of them, you know, and made a lot of money on icos before that whole space sort of collapsed because of enforcement and regulation, and actually many vcs ended up just escaping with the money they made, and a lot of the retail users ended up losing all of their money and getting hurt.

And I think that's what happened last year again with the collapse of a lot of this crypto lenders, where you know, just regular a lot of regular people last everything they had. So I totally agree with you that I think is just memories are short up. Next, more from Bloomberg reported Ubercarif on why Celsius mathos in the crypto ecosystem. We'll be right back. I want to go back to something else. This idea of Celsius new Or believed that they owned customer tokens even while they were

seeing the customers. No, no, no, these are always going to be your assets. Why has this become important in the bankruptcy fight? During sort of YouTube videos and all kinds of weekly you know, talks that Machine Ski did with users, he very frequently said that the sayo tokens, you know, we don't own them. You or the users own them. But many users, turns out, hadn't read Celsius's terms of service, at least in the state that they

were in in the last couple of years. And by the way, the terms of service, there were so many versions of those it actually was part of the big part of the proceedings initially, you know, just trying to find all these different versions of terms of service. But in the terms of service it specifically stated that the users tokens if they sit in certain of the more popular Celsius accounts called Urn. In the scenario, Celsius basically

owns the tokens. And when Celsius when bankrupt, what that meant is that all of the users whose funds were

in the earn accounts, they became unsecured creditors. And obviously, and the judge actually ruled that the tokens do belong to selsius the company versus the users, and so that essentially dramatically reduced the amount of recovery available to those users, right because unsecured creditors, which is, you know, just like a jargon for your very low down in the repayment order, Like, if there's enough assets after we've paid everybody else in

this long list above, you great, But otherwise you're probably not going to get very much, if you get anything at all. Now, most people do not read terms of service, very true. You sign up for something, you open a bank account, you've download a random app onto your phone from an app store, and there's like, yeah, yeah, yeah, I've totally read the terms of service. Tick this box, move on, happily. Most people do not read the terms

of service. Do you think people are going to start paying more attention to these kinds of things because of these collapses, because of how many folks have lost money as a result of them. You know, after reading the Examiner street Port, I might be more inclined to read terms of service, but you know, realistically, we are so busy with our lives, right with everything we do. I mean, who has the time to read you know, the tens or hundreds of pages in there. And plus they're not lawyers.

We you know, not everybody can understand the legalist that's in the terms of service. And I think it's a real problem because you know, I imagine that if a CEO of a company during a YouTube video tells you that this is how things are, you know, most people will will trust what this person will say and sign up for the service, imagining that this is what they're going to get in the end. But that's certainly not

the case, as Celsius showed us. And this is exactly why various regulators around the world are starting to emphasize this idea of should there be better consumer protections for people who are investing in crypto because the assumption that companies are doing appropriate risk management, or even that customers are doing appropriate personal risk management is turning out not to be founded on reality in some of these cases. Absolutely.

I mean, over the last year, so many companies went bankrupt and so many hundreds of thousands of users lost money here in the US because of this. I think this left basically a lot of the regulators here with you know, essentially a black eye. You know, where were they when all of this stuff was happening now. I started this episode by saying that we're not going to talk about FTX, and people will be like, oh, why

fts is so interesting? What should people understand about these other companies in the crypto ecosystem, companies like Celsius and why they are and continue to be important in order to really get a sense of how this overall mark please operates. You know, like any other markets, crypto I

think thrives on on essentially leverage. You know, a lot of people enter this market via leverage, where they would you know, put some money down on a crypto exchange and make bets with you know, a much much larger amount of money. If they lose their bed, they're sort

of collateral, if you will, will evaporate. So a lot of people have been doing this encrypto for a while, for a number of years, and what the scrypto lenders allowed people to do is to even do more complex sort of borrowing and blending strategies and allowed more people to access to leverage. And you know, while I would say most most of the scrypto lenders win bankrupt last ye,

not all of them. The fact of the matter remains that I think people will find out a way to gain leverage in this market as they have another as well, and you know, I think it's just behooves regulators to stay on top of this. Well. On that cheery note, thank you very much, Olger. It's always a pleasure to have you on the show. It was my pleasure. I so appreciate you hapving me on. That was Bloomberg reporto Ogokarf. You can find more of her reporting on the Bloomberg

terminal and on Bloomberg dot com. And if you're interested in all things bankruptcy, because come on, we talk about it a lot on the show, you should check out a new newsletter from our colleagues. It's called The Brink. It's as exciting as it sounds. You can find it on Bloomberg dot com. This is Bloomberg Crypto, a daily podcast from Bloomberg and iHeartRadio. For more shows from iHeartRadio, visit the iHeartRadio app, Apple pod Casts, or wherever you

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