Crypto Fraud Costs Investors $5 billion
A cautionary tale of crypto fosters systemic risks and predatory business practices
By Casia Thompson
Last December, Alex Mashinsky, the founder and former CEO of the crypto lender and trading platform Celsius Network, pled guilty to federal fraud charges and agreed to surrender $48 million in illegal gains from his schemes. Mashinsky admitted he misled customers about the safety of their investment accounts and used their funds to manipulate the price of Celsius’s in-house token. This closes the case on the collapse of one of the most popular crypto platforms for small retail crypto investors, but it’s little comfort to the many Celsius customers who lost their life’s savings, defaulted on payments, or delayed their retirement due to their inability to access their funds.
Celsius began to unravel after the crypto crash in the spring of 2022. The crypto market hemorrhaged value and investors headed for the exits. In particular, Celsius’ risky investments in collapsed firms like Terra and Three Arrows Capital caused a major run, with investors withdrawing as much as 30 percent of all assets held on the platform. Investors with more than $1 million in their Celsius accounts moved the quickest, accounting for 35% of all withdrawals during this period, according to the Federal Reserve. The dominance of large investor withdrawals depleted liquidity, signaled instability, and left smaller investors disproportionately exposed to risk. Celsius promised in early June that it was “full speed ahead” and would “process withdrawals without delay.” But days later it reversed course and froze customer account access and by the end of the month it filed for bankruptcy.
This is not just a tale of a crypto bank run; it is a cautionary tale of how the crypto industry fostered systemic risks and predatory business practices.
Celsius misled investors that it was essentially a crypto-age bank. Celsius Network’s catchy slogan, “Unbank Yourself,” promoted the dream of financial freedom for people looking for safe crypto savings alternatives. It promised all the account safety of traditional banks with the added bonus that crypto accounts could earn as much as 18 percent returns versus the average 0.43 percent interest rate at savings accounts. In reality, Celsius was a risky investment fund that misled investors regarding the nature of its business and what it did with account holders’ money, according to the Justice Department.
Celsius used investors’ money to pump up the company’s own CEL token. Celsius bought up hundreds of millions of dollars in CEL, which artificially inflated and illegally manipulated the value of CEL. Celsius paid accountholder rewards in CEL, without disclosing that it used accountholders’ funds in this pump-and-dump scheme that company insiders compared to a Ponzi scheme. The manipulated CEL enriched Mashinsky and made Celsius seem more robust than it actually was, and when the cryptocrash hit in 2022, Mashinsky misrepresented Celsius’ risks, falsely assuring customers their funds were safe. In reality, Celsius accountholders didn’t receive any of the commonsense protections that depositors might get from their banks, such as FDIC insurance from traditional brokers or Securities Investor Protection Corporation (SIPC) support, which protects up to $500,000 held in customer accounts. When crypto markets plunged, worried Celsius customers scrambled to withdraw their money, only to find their accounts frozen. Celsius’ fraudulent manipulation of CEL and its overexposure to the crypto market meant it couldn’t weather the downturn. Celsius’ promise turned into a financial nightmare for those who saw crypto as an asset for storing their hard-earned money. Thousands of people lost their savings to rampant fraud, mismanagement and greed.
The Los Angeles Times catalogued some of those hurt by Mashinsky’s fraud. Harald Lott, a Nashville nurse, who deposited $14,000 worth of crypto, trusted Mashinsky’s promise that Celsius was safer than a bank. When the platform collapsed, his savings became inaccessible without any warning. Andrew, a customer who had invested his life’s savings of $125,000 with Celsius, described the emotional and economic toll to a reporter as “financial death.” And Brandon Lawrence, a Los Angeles-based information technology worker, deposited two bitcoin into his Celsius account — worth $52,000 at the time — purchased with a margin loan from another platform, in hopes that he’d be able to easily pay back the loan due to Celsius’ promised high rates of return. At the time, Lawrence said “[This] was my nest egg…. Now when I go to work, I drink water and eat any scraps I can find for lunch…. I am in a deep depression and do not know if I can pull myself out of this.”
All told, Celsius customers lost more than $5 billion. These customers weren’t just crypto millionaires gambling with their disposable income, they were ordinary people saving for retirement, education, or simply trying to grow their money in a company that promised high security, high reward, and low risk.
More than two years after the crash, final rulings from Celsius’ bankruptcy proceedings provided some relief, but at a high cost. The bankruptcy court’s rulings only awarded accountholders 60 percent of their holdings at the time the company shut down — giving them only a portion of what they held after the market crash.
Yet today, it’s as if Celsius never happened. The crypto industry is riding high on the power it has purchased through its profligate political spending. Crypto asset values are surging due to speculation about the political favors it might harvest. But the problems in the crypto sector haven’t gone away, and we know from past crypto boom and busts that these markets conceal all kinds of fraud. Scammers capitalize on the swelling crypto bubble when people are more vulnerable to come-ons lest they miss out on the crypto craze. Rising crypto prices can conceal deceptive practices and market manipulation because crypto cheerleaders and investors are too giddy with riches to notice, or call out, misconduct.
The Mashinsky guilty plea should be a clarion call for policymakers to resist the industry’s push for light-touch rules and regulations. The Celsius debacle didn’t just happen because a bad actor committed a crime; it happened because too many investors and industry advocates looked the other way. If policymakers legitimize the industry’s flawed business model with new industry-crafted rules, the fallout of the next crypto collapse will be felt much more widely.
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