Celsius Used New Customer Funds To Pay for Other Withdrawals

Key Points:

• Celsius suspended customer withdrawals on June 12, new customer deposits would have become the only liquid supply of coins to support withdrawals.
• The firm’s mining division may owe more than $23.1 million in use taxes and has set aside $3.7 million in liabilities for UK VAT.

Coindesk reported that Celsius deceived its investors and sometimes utilized new client funds to pay for other customers’ withdrawals, which is the standard definition of a Ponzi scheme, according to an independent examiner for the New York bankruptcy court in a filing on Tuesday.

Shoba Pillay, who was invited by the court in September to provide an independent perspective on what was going on at the crypto lender, has now written an overview of the firm’s operations in the run-up to bankruptcy being declared in July.

Promises of a community-led lending system with extravagant rewards and financial independence clashed with a reality in which the firm was primarily generating the market in native token CEL and wasn’t being honest with clients about the risks they faced, according to Pillay.

Celsius’s Coin Deployment Specialist Dean Tappen criticized Celsius’s procedures as “very ponzi-like” in April 2022, according to Pillay, who added that staff were aware of the disparity between internal CEL mechanisms and public pronouncements.

Celsius suspended customer withdrawals on June 12, new customer deposits would have become the only liquid supply of coins for Celsius to support withdrawals.

In other cases, the arrangement was less clear, such as between May and June 2022, when the firm had to unwind borrowing due to inadequate crypto profits to pay CEL buybacks.

Celsius recognized that it should not use customer assets to purchase the coins necessary to cover liabilities to other customers. It justified its use of customer deposits to fill this hole in its balance sheet on the basis that it was not selling customer deposits but instead posting them as collateral to borrow the necessary coins.

Pillay said

Pillay also discovered serious tax compliance issues in the corporation, claiming that its mining division may owe more than $23.1 million in use taxes and has set aside $3.7 million in liabilities for UK VAT.

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