Celsius’ difficulties take on a new dimension following recent revelations by one of their former partners. Celsius is said to have simply orchestrated a Ponzi scheme that is financially unsustainable in the long term.
Last year, in the middle of the bull market, an Ethereum address stood out for its high activity. This address, known as “0xb1”, spent $150,000 worth of Ethereum in a few months on transaction fees.
On Twitter, Jason Stone, creator of the company KeyFi, revealed that he was the manager of the above address. He and his team would have run 0xb1, as well as other addresses on behalf of Celsius. In concrete terms, KeyFi would have been in charge of implementing DeFi strategies for Celsius’ customers.
Within a few months, several hundred million dollars of customer deposits were transferred by Celsius to the various addresses. At the time of the termination of their collaboration, KeyFi was managing nearly 2 billion dollars of assets on behalf of Celsius.
Celsius accused of inadequately hedging its clients’ investment
Initially, the collaboration between the two companies appeared to be sound. Indeed, the Celsius risk management team was to actively monitor the investment strategies implemented by KeyFi using management tools such as HedgeGuard and DeBank.
In the contract between the two entities, Celsius, through its trading arm, was to cover any losses related to KeyFi’s impermanent loss in the liquidity pools by implementing risk management and hedging taking into account the fluctuating price of crypto currencies. Unfortunately, at the end of February 2021, KeyFi discovered the truth and understood that Celsius had lied about its activity.
Specifically, Celsius would not have hedged KeyFi’s business or anticipated the volatility of crypto-currencies. Thus, the company’s entire portfolio was exposed to the market. As a result, KeyFi informed Celsius of its intention to end their collaboration.
Celsius’ insolvency directly linked to the orchestration of a Ponzi scheme?
After several weeks, KeyFi and Celsius ended their collaboration by unwinding any DeFi position held by Jason Stone’s company. Nevertheless, the total position was heavily impacted by impermanent loss related to the sharp rise in the price of Ethereum.
Celsius’ strategy was simple. Its clients provided it with assets with the expectation of receiving said assets in the same form after a certain time. Celsius provided the assets deposited by its customers to KeyFi for the company to invest. However, Celsius expected the profits from these investments to be valued in dollars.
However, when the price of Ethereum soared in the midst of the bull market, Celsius was unable to cover the impermanent loss associated with liquidity pools. So when customers sought to withdraw their Ethereum deposits, Celsius was forced to buy Ethereum on the market at historically high prices.
To cover the liquidity crisis resulting from these purchases, Celsius reportedly began offering double-digit interest rates to attract new depositors to its platform. From then on, the funds of these new depositors were used to pay back previous deposits.
A formal complaint filed in New York State
Jason Stone believes that “given the public speculation about Celsius’ creditworthiness, it is prudent to finally set the record straight”. Accordingly, he has filed a lawsuit against Celsius.
The complaint filed in the New York State Supreme Court states that “Celsius continued to hold itself out as a transparent and well-capitalised company, but had in fact become a Ponzi scheme.
While Celsius’ presumption of innocence calls for caution as to the veracity of these accusations, the length and precision of the complaint is troubling. Moreover, according to the complaint, the former CFO of Celsius was concerned about the company’s actions and directly questioned Celsius’ senior management about the shortcomings observed.
We will now have to wait for the results of the official investigation and the court’s decision to sort out the truth of this accusation.