Key Figures Deeply Expose the Inside Story of Celsius's Collapse: Manipulating Token Prices Using Customer Assets, Essentially a Ponzi Scheme (With Indictment Attached)
The well-known Ethereum address "0xb1" is officially managed by Jason Stone, who today revealed his true identity and detailed his collaboration with Celsius during the period of 2020-2021, as well as the serious issues he discovered with Celsius during that time.整理：胡韬 & 饼干，链捕手
On July 8, the Celsius incident received another major revelation. Jason Stone, the former CEO of KeyFi behind the 0xb1 Twitter account, announced a formal lawsuit against Celsius, accusing the company of operating a "Ponzi scheme" and severely mismanaging customer funds, failing to conduct basic internal audits to clarify its obligations, and using customer assets to manipulate the cryptocurrency market.
According to Jason Stone, his DeFi strategy deployment company KeyFi was acquired by Celsius in 2020, after which it staked and deployed DeFi strategies for Celsius. He also disclosed that the infamous "0xb1" address was actually created by Celsius and was initially managed directly by him, executing various DeFi yield strategies that brought Celsius profits exceeding hundreds of millions of dollars.
However, during the collaboration, Jason Stone discovered numerous serious violations by Celsius, including transferring hundreds of millions of dollars of customer deposits to the "0xb1" address for investment without basic risk control measures. Previously, Celsius executives repeatedly assured him that the company had conducted necessary hedging trades to ensure that the price fluctuations of certain cryptocurrencies would not significantly adversely affect the company's ability to repay depositors.
Additionally, in 2020, Celsius used approximately 4,500 bitcoins (currently valued at $90 million) as customer deposits to purchase CEL, artificially inflating the price. Jason Stone believes that, in essence, Celsius was manipulating the CEL token market so that it could borrow from its large treasury, creating a situation where it appeared to generate profits exceeding its debt obligations, when in fact it did not. Previously, Celsius had also obtained a $1 billion loan from Tether.
"Because its business model relies on providing depositors with more funds than they put in, Celsius must continuously absorb new capital to pay its debts to existing depositors. In other words, Celsius is a Ponzi scheme," Jason Stone wrote in the lawsuit.
After realizing the various issues, Jason Stone decided to resign in March 2021, but Celsius has since refused to pay them their share of the profits. "Given the public speculation about the company's solvency and my observations of Celsius's tenuous relationship with the truth, I believe it is wise to clarify the facts once and for all. I have filed a lawsuit against Celsius to resolve this issue once and for all."
Below is a compilation of the key parts of the lawsuit by Chain Catcher to help readers further understand the details of the Celsius incident.
Introduction
KeyFi ("Plaintiff") is suing Celsius Network Limited ("Celsius") and Celsius KeyFi LLC ("Celsius KeyFi") for the following allegations:
This lawsuit involves the defendants' refusal to fulfill contractual obligations to pay the plaintiff millions of dollars owed under a profit-sharing agreement signed by both parties in 2021. The dispute reached a peak when the plaintiff discovered that the defendants were using Celsius's customer deposits to manipulate the cryptocurrency market, failing to establish basic accounting controls that jeopardized those deposits, and failing to fulfill their commitments that induced the plaintiff to adopt various trading strategies.
On June 12, 2022, the issues discovered by the plaintiff in March 2021 not only harmed the plaintiff but also harmed hundreds of thousands of users of the defendants' platform, as the defendants now refuse to accept requests from their customers to retrieve their deposited and entrusted assets.
The defendants operate a "crypto lending platform" that receives crypto asset deposits from consumers trying to earn interest on their crypto assets. The defendants' business relies on generating income from these asset pools by (1) lending these assets to others and (2) investing the funds in the crypto market. Therefore, the defendants' profits depend on their income exceeding or matching the amount they need to pay consumers for deposits. Before the plaintiff appeared in court, the defendants had no unified, organized, or comprehensive investment strategy, only lending out the consumer deposits they received. Instead, they were desperately seeking a potential investment that could earn them more money than they owed depositors. Otherwise, they would have to use additional deposits to pay interest on previous deposits, which is a typical "Ponzi scheme."
Recent disclosures indicate that Celsius has no assets on hand to fulfill its withdrawal obligations, suggesting that the defendants are indeed operating a Ponzi scheme.
Jason Stone, CEO and founder of KeyFi, is a pioneer in the modern cryptocurrency deployment strategy field. From August 2020 to March 2021, he managed billions of dollars in crypto asset investments for the defendants.
For most of the time, both parties conducted business without any formal written agreement, instead acknowledging that the enterprise they were engaged in was "mutually beneficial based on mutual respect and trust." From August 2020 to March 2021, the plaintiff generated hundreds of millions of dollars in profits for the mutual benefit of both parties. These profits appeared in the form of trading fees, staking token rewards, and other value-added assets. Like any investment relationship, the plaintiff and Stone were responsible for profiting from the funds provided to them, while Celsius was responsible for ensuring that its investment strategies did not prevent it from repaying depositors in kind.
When Stone discovered that the defendants not only lacked basic security controls to protect the billions of dollars in customer funds they held but were actively using customer funds to manipulate the cryptocurrency market for their own benefit, the relationship between the two parties began to fracture. The most shocking example was when the plaintiff discovered that Celsius was using customer bitcoin deposits to pump its own cryptocurrency "Celsius token" ("CEL").
Stone also learned that the defendants failed to conduct basic accounting practices that jeopardized customer funds in multiple incidents. One example includes improper accounting for certain amounts owed to customers, resulting in the company incurring $200 million in debt without even knowing how or why it owed the money.
These incredible losses mean that if customers request a return of funds, billions of dollars in customer deposits will not be returned to those customers. Celsius is not concerned about these risks, as it believes that the billions of dollars in customer deposits it manages are its own property. Specifically, the terms of service on the Celsius website state, "As part of the service, all digital assets transferred to Celsius are owned and held by Celsius itself." Furthermore, the Celsius terms of service state, "Celsius does not represent that you hold any digital assets," but rather "owns, holds, and/or."
When the plaintiff expressed concerns about Celsius's use of customer funds without proper risk management, Celsius executives repeatedly assured Stone that the company had conducted necessary hedging trades to ensure that price fluctuations of certain cryptocurrencies would not significantly adversely affect the company or its ability to repay depositors. Stone and his team relied on these representations when deploying certain trading strategies.
But these commitments were all lies. Despite Celsius's repeated assurances, it failed to implement basic risk management strategies to guard against the inherent price volatility risks in many of the deployed investment strategies. These failures not only harmed the plaintiff's interests and negatively impacted profit shares but also now led to Celsius refusing to accept customer withdrawal requests.
Celsius's former CFO shared the same concerns as the plaintiff and raised these issues multiple times with Celsius's senior management.
Faced with increasing evidence of the defendants' disorganization, mismanagement, and fraud, the plaintiff concluded that he could no longer work for the defendants. In March 2021, the plaintiff notified the defendants that he would terminate the business relationship. In retaliation, the defendants repeatedly refused to acknowledge Stone's resignation and then refused to pay the plaintiff their share of the profits.
Recent unfortunate events that have publicly unfolded indicate that the plaintiff was right—Celsius's management of its customer funds is severely improper, failing to conduct basic internal audits to clarify its obligations, and manipulating cryptocurrency assets to benefit itself and its clients.
Jurisdiction and Venue
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Factual Allegations
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C. Celsius Business Model
Celsius is a cryptocurrency lending platform that facilitates loans for various crypto assets. Celsius's business model is similar to that of deposit lenders, accepting consumer monetary deposits and then using those funds to provide liquidity to the market through loans and investments. However, in Celsius's case, depositors hand over their crypto assets to Celsius instead of fiat currency in exchange for promised interest rates.
Like a bank, Celsius is expected to responsibly invest these funds, earn returns, pay depositors the interest they earn, and retain profits. Importantly, if Celsius cannot invest depositors' funds in investments that yield returns exceeding the interest owed, it will incur losses. However, the core promise of consumer trust is that Celsius has sufficient funds to return each user's crypto asset deposits upon request.
Celsius's business model aims to replicate traditional deposit banking, but their terms of service attempt to shield them from the same liabilities. For example, the terms of service state that any funds are not held in customer accounts but become the customer's book property. Celsius can use them at will. Moreover, unlike traditional deposit institutions, Celsius does not insure any losses of customer funds with its own insurance. Celsius effectively employs legal evasions that absolve it of any responsibility for its customers' funds.
Celsius does not provide loans to consumers based on credit but only offers loans to retail borrowers who deposit crypto assets as collateral. For example, if a borrower wants to borrow $10,000 using bitcoin as collateral, they must deposit nearly four times that amount and lock in at the lowest offered interest rate. Borrowers must also maintain certain collateral ratios; otherwise, Celsius will liquidate the collateral to secure the loan. This is different from the margin calls of traditional stock brokerage firms.
Like many other crypto asset businesses, Celsius issued its own crypto asset, a token named "CEL," in March 2018. Celsius promoted the use of its CEL token by offering higher interest rates for those who chose to receive interest payments in CEL tokens compared to other payment methods. Similarly, customers repaying loans with CEL were charged lower interest rates. Crucially, Celsius's entire balance sheet is conducted on a dollar basis for business operations. Therefore, if the price of the CEL token rises, Celsius can pay customers fewer CEL tokens as interest.
Due to the growing demand for crypto lending platforms, the deposits held by Celsius for its consumers have become extraordinarily large. Indeed, just a few months before submitting this document, Celsius held over $20 billion in crypto asset deposits.
Despite the staggering amount of customer deposits, Celsius and its management have little experience trading and investing in crypto assets. In the summer of 2020, due to the lucrative returns generated by DeFi innovations and complex concepts, Celsius sought to participate in DeFi but lacked expertise. Celsius saw an opportunity to leverage its customer funds to participate in the DeFi project boom and attempted to hire an expert to manage customer funds for deployment in DeFi protocols.
D. Celsius Recruits Stone and His Team to Manage Customer Deposits
In the summer of 2020, Celsius sought out and wooed its crypto asset trading team.
Jason Stone is the founder and CEO of KeyFi, a technology company focused on DeFi deployment and related strategies. Stone and his team achieved significant success in the DeFi space and accomplished profitable DeFi strategies. Celsius's founders were familiar with Stone. From late 2019 to early 2020, Alex Mashinsky (Celsius's founder and CEO) and Nuke Goldstein (Celsius's co-founder and CTO) invested tens of thousands of dollars in KeyFi.
In 2020, Stone had multiple discussions with Mashinsky and other Celsius managers about the possibility of using KeyFi's expertise to deploy advanced strategies to profit from customer deposits. That summer, the plaintiff KeyFi and Celsius reached a handshake agreement for KeyFi to manage billions of dollars in crypto deposits from Celsius customers.
Around August 19, 2020, without a formal agreement, Celsius began transferring hundreds of millions of dollars in crypto assets to Stone and his team. Celsius created a new Ethereum wallet address called the "0xb1" account, to which nearly all assets transferred by Celsius were deployed by Stone.
At no time did Celsius relinquish complete control over the 0xb1 account; indeed, for most of the time Stone worked with Celsius, he could only access the 0xb1 account by logging into a computer account controlled by Celsius that was logged into 0xb1 via a VPN.
Shortly thereafter, the Celsius platform granted Stone direct access to the 0xb1 account. This was due to a "DNS attack" on the service provider GoDaddy.com. During the hack, it affected all of Celsius's cloud infrastructure and environments, and both Celsius and KeyFi were concerned that hackers could completely hijack all of Celsius's network traffic. Therefore, to protect the 0xb1 account, Celsius provided Stone with the private key to the 0xb1 account so that he could access it smoothly without using a VPN.
All deposits and transaction history related to the 0xb1 account can be viewed on Etherscan: https://etherscan.io/address/0xb1adceddb2941033a090dd166a462fe1c2029484.
Despite the staggering value of the transferred assets and both parties' intention to share the profits generated from the assets, there was no formal written agreement between the two parties. This amounted to Celsius continuing to transfer hundreds of millions of dollars to Stone, entrusting Stone and his team to invest, all based on a handshake agreement.
In addition to transferring crypto assets to Stone for investment, Celsius also conducted certain trades in Stone's name but did not transfer control of the assets to Stone. The parties agreed to record the profits and losses from such trades in KeyFi's profit and loss statement, with the aim of calculating the profit shares for KeyFi and Stone.
This strategy made sense because all crypto assets deployed by Stone were provided by Celsius; therefore, it was important whether the tokens had actually transferred before KeyFi's deployment. This strategy also reflected the relationship between the two parties. Both were parties of trust and trustworthiness, mutually dependent, with funds allowing both to benefit.
In October 2020, Celsius and Stone decided that certain DeFi trades required proper risk management and hedging to guard against the volatility caused by rising token prices. Specifically, Celsius's management informed Stone that it would monitor Stone's DeFi activities and deploy certain hedging strategies to guard against price fluctuations. This was because Stone's DeFi strategies were based on depositing large amounts of ETH into liquidity pools, which would reduce the amount of ETH in the pool when ETH appreciated.
2. Celsius / KeyFi Memorandum of Understanding (The Celsius / KeyFi MOU)
- KeyFi's investment strategies were highly profitable. Therefore, around October 1, 2020, Celsius Network and KeyFi jointly managed user funds for over a month. KeyFi signed a memorandum of understanding ("MOU") in which they sought to form a cooperative structure, with KeyFi providing DeFi strategies and its employees to Celsius through special channels.
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The parties respected and trusted this special relationship because they were operating in a high-risk and unusual business environment. Celsius had already transferred hundreds of millions of dollars to Stone and his team without any formal written agreement (before the memorandum of understanding).
For its part, KeyFi agreed to devote all its resources to capture all crypto financial opportunities to manage Celsius's investments, all without any formal protective documentation. In addition, KeyFi relied on Celsius to deploy necessary hedging strategies as a supplement to KeyFi's investment strategies and to protect KeyFi from customer deposit losses due to price fluctuations in trading crypto assets. Of course, KeyFi believed that its new business partner Celsius would generally operate with integrity.
3. Asset Purchase Agreement and Service Agreement
- Given Stone's successful management of Celsius customer deposits, Celsius was clearly very satisfied with Stone's management, leading them to decide (1) to continue sending funds to Stone for deployment on a weekly basis, and (2) to advance the formal signing of the agreements envisioned in the memorandum of understanding. Ultimately, around December 31, 2020, a series of two contracts drafted by Celsius formalized the cooperation between KeyFi and Celsius: the Asset Purchase Agreement ("APA") (attached as Exhibit A) and the Service Agreement (attached as Exhibit B).
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i. APA Purchase Price
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ii. Calculation of Compensation Payments
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Net profit is defined in the pricing arrangement and service agreement as a function of gross profit from all activities in dollars minus certain costs and management fees. Celsius violated the APA and service agreement by refusing to provide KeyFi with accounting and expenses for such fees. However, KeyFi estimates that the gross profit allocable to the parties exceeds $838 million after deducting such costs and expenses.
Celsius violated the APA, and Celsius and SPV refused to pay KeyFi its agreed share of these profits.
E. Celsius's Failure to Hedge Stone's DeFi Activities
Celsius objected to KeyFi receiving any profits due to Celsius's failures to protect itself from the risks of cryptocurrency appreciation. Celsius's customers provided it with crypto assets and expected to recover those assets in the same form. Celsius provided similar assets to Stone and KeyFi for investment but offered profits assessed in dollars. This created a risk for Celsius that KeyFi might earn dollar profits, but if the crypto assets appreciated in value, it might not be able to profitably repurchase the underlying crypto assets.
For example, if Celsius provided KeyFi with 100 ETH, valued at $100,000 (assuming each ETH is $1,000), and KeyFi's investment returned a combination of 50 ETH and other tokens worth a total of $150,000, this would undoubtedly constitute a profitable dollar investment. However, if during the same period, the price of ETH rose to $1,250 per token, Celsius would need to convert its dollar investment back into ETH, using some of its dollar profits to do so. If the price of ETH rose further, it might exceed the profits and require Celsius to use its own funds to purchase ETH. This potential risk, a product of Celsius's relationship with its customers, was not addressed in the agreements between the parties and thus remained with Celsius.
At any time, there was a simple solution to this risk: Celsius could have hedged using futures contracts when providing cryptocurrency to Stone and KeyFi. In other words, if Celsius had purchased call options at the price of each token it provided to Stone and KeyFi, it would have completely avoided the risk of asset appreciation eroding Celsius's dollar profits.
In fact, Celsius was aware of this risk and solution. Celsius informed Stone that it was tracking his DeFi activities and balancing risks through various hedging strategies, and that such trades were considered "approved activities" when executing that strategy.
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- Celsius's failure to hedge was a significant mistake. Celsius had deep knowledge that Stone's DeFi strategies involved depositing large amounts of ETH into liquidity pools, which effectively reduced the amount of ETH in the pool when ETH appreciated. This required appropriate hedging strategies, but during these trades, ETH was relative to other crypto assets and dollars. Whether Celsius hedged the exact risks as a party before and after the execution of the pricing arrangement would have resulted in substantial additional net profits for both parties.
F. Stone Discovers Celsius's Severe Mismanagement of Customer Funds
In January 2021, around the time of the signing of the APA and service agreement, KeyFi was shocked by Celsius's improper business conduct and ultimately concluded that Celsius's business practices were highly corrupt, making it impossible for him and KeyFi to continue doing business with Celsius. Stone's three findings formed the basis for his decision to step down as CEO of KeyFi:
First, KeyFi realized that since at least February 2020, Celsius had engaged in a series of trades aimed at artificially inflating the price of the CEL token. Celsius's token deployment director, Connor Nolan, informed KeyFi that Celsius had used approximately 4,500 bitcoins (currently valued at $90 million) as customer deposits to purchase CEL on the open market from February 2020 to November 2020, artificially inflating the price.
The purpose of this scheme was both fraudulent and illegal: Celsius induced customers to pay in CEL tokens by offering higher interest rates. Then, by deliberately and artificially inflating the price of the CEL token, Celsius was able to pay those customers who chose to receive interest in CEL tokens even less crypto assets.
Furthermore, by artificially raising the price of the CEL token, Mashinsky—who personally owned CEL tokens worth hundreds of millions at the peak of the CEL token—was able to greatly enrich himself.
The scheme also indicated that there was significant demand and trading volume for the CEL token. Celsius used this artificial demand to persuade lenders that the CEL tokens it held in its treasury were liquid, marketable assets that could be used as collateral for loans to Celsius. Celsius used these loans to pay interest to customers and provide loans backed by cryptocurrency collateral. As Celsius continued to strive to increase its profits, these loans were crucial for Celsius's ongoing operations. Essentially, Celsius was manipulating the CEL token market so that it could borrow from its large treasury, creating a situation where it appeared to generate profits exceeding the amounts owed to customers, when in fact it did not.
Second, Stone realized that Celsius had deceived him by claiming that there were hedging trades aimed at hedging the authorized DeFi trades Stone was conducting. Celsius's failure to implement the promised hedging trades harmed not only Stone and KeyFi. Stone learned that Celsius's failure to properly hedge all its profitable activities exposed other customer deposits (i.e., those not managed by SPV) to potential losses in the billions of dollars.
Third, Stone discovered further financial mismanagement that could potentially lead the company into bankruptcy. As mentioned above, Celsius paid a portion of the interest on CEL token deposits, as well as a portion of the interest on other cryptocurrencies like bitcoin and ethereum. For consumers who chose to be paid in the crypto assets they deposited (rather than CEL tokens), Celsius recorded these liabilities on its books in dollar terms from 2018 to 2020, even though it paid customers in the underlying tokens. Then, as the crypto assets appreciated, it failed to mark these assets to market on its internal books, creating a massive hole in its accounting.
Between 2020 and 2021, cryptocurrencies like bitcoin and ethereum appreciated significantly against the dollar. However, at least until 2021, Celsius failed to update its distributed ledger to reflect the increased dollar value of its liabilities. The accounting errors obscured hundreds of millions of dollars in liabilities that Celsius was unprepared to pay. When Jason Stone left Celsius, there was a $100 million to $200 million hole on Celsius's balance sheet that it could not fully explain or resolve. Despite the balance sheet showing signs of bankruptcy, Celsius continued to take on more customer assets, meaning it continued to accumulate significant debts, harming the interests of existing creditors.
G. Ponzi Scheme
In January 2021, the crypto market entered a bull cycle, causing Celsius (which had recklessly and fraudulently failed to hedge its investments) to suffer severe exchange rate losses.
In January 2021, the price of ETH rose more than 50% in just a few days and continued to climb in the following weeks.
Celsius owed massive debts to depositors denominated in ETH, but its holdings of ETH did not equal those debts. Instead, Celsius authorized DeFi strategies that led to assets being transferred from ETH to other cryptocurrencies and, perplexingly, failed to hedge this well-known risk.
When customers attempted to withdraw their ETH deposits, Celsius was forced to purchase ETH on the open market at historical highs, incurring massive losses. Faced with a liquidity crisis, Celsius began offering double-digit interest rates to attract 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, it had effectively become a Ponzi scheme.
H. Jason Stone Resigns; Celsius Refuses Payment
By March 2021, KeyFi was clearly aware that Celsius had lied about its hedging practices, a mistake that could have financial repercussions for Celsius and its consumers. This could also cause irreparable damage to KeyFi's reputation.
At that time, Celsius had already missed the first payment (the "profit payment") due to KeyFi within 15 days of December 31, 2020, and had never paid any profits owed to KeyFi or SPV. Furthermore, the defendants had no intention of paying the required profits under the memorandum of understanding, APA, and service agreement. Although Stone had been authorized to purchase NFTs ("non-fungible tokens") as a prepayment for the profit shares under the memorandum of understanding, APA, and service agreement, Celsius failed to provide a specific breakdown of the total profit shares.
On March 9, 2021, Stone notified Celsius that he would no longer serve as CEO of Celsius KeyFi.
After Stone left Celsius KeyFi, Celsius continued to access and control the 0xb1 wallet. Celsius CEO Alex Mashinsky used this control for his personal benefit. In one instance, the Celsius CEO transferred valuable non-financial assets from the 0xb1 account to his wife's wallet.
According to information, since Stone's resignation, Celsius has not identified any other value-accretive acquisitions that could offset the high interest rates it offered to depositors. Because its business model relies on providing depositors with more funds than they put in, Celsius must continuously absorb new capital to pay its debts to existing depositors. In other words, Celsius is a Ponzi scheme.
For example, to pay its increasing debts, Celsius was required to obtain a loan of approximately $1 billion from Tether. While Celsius paid 5%-6% interest on this $1 billion loan, its debts to customers significantly increased as it accepted many popular tokens as deposits:
- The Tether loan and other Celsius deposits were used to cover up the fact that Celsius was actually insolvent on its balance sheet, with less money in its treasury than it owed to depositors. Even so, until it recently halted customer withdrawals, Celsius continued to promote its high-interest deposits to attract new depositors to provide more funds to repay earlier depositors.
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J. Celsius Suspends Customer Withdrawals Due to Mismanagement
On June 12, 2022, Celsius announced: "Due to extreme market conditions, we are announcing today the suspension of all withdrawals, trades, and transfers between accounts. We are taking this action today to better fulfill our withdrawal obligations over a period of time."
Celsius took this drastic action because it had no (and still does not have) enough crypto assets on hand to fulfill the debts it owed to customers.
Just days before this announcement, on June 7, 2022, Celsius claimed, "According to our comprehensive liquidity risk management framework, it has sufficient reserves (as well as enough ETH) to meet its obligations." This turned out to be a lie. This lie also aligns with the representations made to the plaintiff regarding its risk management.
Reports indicate that Goldman Sachs is seeking to acquire Celsius's assets at a low price of $2 billion (as of May 17, 2022, customer deposits were valued at approximately $11.8 billion). It is important to clarify that, according to Celsius's terms of service, Celsius claims that these assets provided by ordinary consumers are its property and do not represent any customer holdings. Therefore, any such asset purchase could potentially erase customer deposits to pay Celsius's own creditors.
The plaintiff filed this lawsuit to hold Celsius accountable for its severe mismanagement of customer deposits and its breach of contractual obligations to the plaintiff.
