How Celsius lost its customers' hundreds of millions of dollars on high-risk schemes

In June, Celsius Network froze withdrawals of funds. It turned out that deposits from users of the service could have been used to manipulate the price of the company's token and for risky trading schemes with turnover of hundreds of millions of dollars.

More than $20 billion in assets accumulated on deposits at Celsius. The company offered interest rates of up to 18% per annum on cryptocurrency deposits, so it's not surprising that with such tempting terms an impressive investor base was easily accumulated. The head of the company Alex Mashinsky always publicly assured skeptics that Celsius had developed investment schemes that bring profit, covering high rates on deposits.

On Thursday, July 7, a lawsuit was filed in a New York State Supreme Court by Jason Stone, one of the former Celsius asset managers, and his company KeyFi Inc. The charge lists Celsius' insolvency, inability to cover payouts to investors and “severe exchange rate losses” associated with falling prices of most cryptocurrencies on the market. Stone calls Celsius a Ponzi scheme and accuses it of failing to pay hundreds of millions of dollars.

A Twitter thread in which Stone shares details of the Celsius story quickly went viral. For the sake of publicizing the lawsuit, Stone publicly revealed his identity for the first time. While managing assets for Celsius, he also maintained a popular Twitter account, @0xb1.

As an anonymous influencer, Stone has made a lot of noise in the NFT community as a major collector. The nickname 0xb1 comes from part of a character set of a verified Ethereum address, whose owner is defined by the analytics service Messari as a “large yield farmer within the Ethereum ecosystem, managing in excess of $450 million that are deployed in numerous yield-generating strategies across DeFi protocols.” That address lists an NFT image of Demon Mutant Ape #4849 from the Mutant Ape Yacht Club collection purchased last October for a million dollars, and it also appears on Stone's Twitter avatar. At the time of publication, this NFT is listed on the Opensea Marketplace for 11 111 ETH.

Hi all! I’m Jason Stone, and from August 2020 until April 2021, I led the group of talented individuals who managed the 0xb1 address.— 0xb1 (@0x_b1) July 7, 2022

According to the indictment by Stone and his company KeyFi, Celsius used its customers' funds uncontrollably in risky trading strategies. Beginning in August 2020, the company started transferring hundreds of millions of dollars worth of cryptocurrencies to KeyFi addresses. Although there was no contract between the companies, Celsius gave Stone private keys to the service's wallets, giving him full control over the cryptocurrency owned by Celsius.

The funds had to be invested in various DeFi-protocols. At the time, many DeFi services were paying significant fees in their proprietary tokens for providing liquidity. According to documents filed with the court, KeyFi made more than $800 million for Celsius on liquidity farming. According to Stone, he owns 20 percent of the earnings, but he received nothing from Celsius.

As Stone writes, Celsius accepted deposits in bitcoin and Ethereum, but rewards from DeFi projects were paid in their tokens. If the exchange rate of BTC or ETH rose more actively than the price of those tokens, Celsius could find itself in debt in dollar terms, even with profits from liquidity farming. In addition, Celsius kept records of user deposits in US dollars, but in fact deposits were made in bitcoins and other cryptocurrencies. When this came to light, the result was a “$100 million to $200 million hole in the balance sheet.”

Celsius raised $50 million in an ICO in 2018. The company's management owned significant amounts of the proprietary CEL token. According to Stone, in 2020, Celsius used $90 million in customer funds in bitcoins to “artificially inflate” the CEL token, which let Mashinsky “enrich himself” and his company attract lucrative loans secured against assets in CEL. Stone also claims that Celsius borrowed a billion dollars in USDT stablecoins from Tether to cover balance sheet mismatches.

Stone claims he ended his relationship with Celsius in March 2021 as soon as he discovered the listed improprieties. He says Celsius managers assured the company was in order with its risk management and hedging. “In late February 2021, we discovered Celsius had lied to us,” Stone writes.

Following the money

Stone didn't elaborate on the amounts, limiting himself to the abstract “hundreds of millions,” but according to a report published on July 8 by analytics company Arkham, $534 million worth of cryptocurrency was put under his company's management.

Coverage of the Celsius crisis has thus far been superficial and anecdotal.Using on-chain and off-chain data and analytics, Arkham has revealed a more comprehensive picture of Celsius' activity. 1/14— Arkham (@ArkhamIntel) July 8, 2022

The report's authors cite data from on-chain analytics that found that KeyFi's investment strategy “resulted in apparent losses of $390 million when the asset manager returned capital compared to the value of the crypto assets Celsius originally sent at the time of return.” The report suggests that at least some of those funds belonged to Celsius clients.

By examining the movement of assets on the blockchain, Arkham analysts were also able to link Stone's farming address to the KeyFi team even before Stone publicly admitted that the address and account @0xb1 belonged to him and his company.

According to Arkham, between August 2020 and April 2021, $534 million worth of cryptocurrency went from Celsius wallets to address 0xb1 through 260 transactions ranging in value from one thousand to $28 million. The funds were then invested in various liquidity pools on decentralized exchanges, as well as the Compound and Aave lending protocols. NFTs worth $6,3 million were bought from the same address, including works by artist Beeple, images from the CryptoPunks collection and other sensational projects.

The report cites a 2020 audit by Chainalysis, which confirmed that Celsius had $3,3 billion in assets under management. By that time, $365 million in cryptocurrency had already been sent to Stone's address, which is about 10% of Celsius users' deposits. Five months later, another $180 million in cryptocurrency taken from the same deposits was added to this amount.

According to the analysis, a total of $1,13 billion in crypto assets were returned from Stone's address from February to May 2021, representing a 111 percent return in dollar terms. The report notes that Stone and his company's cryptocurrency returns are “not nearly as impressive.” The jump in the cryptocurrency market during this period, when bitcoin rose from $11 000 to $60 000, by itself brought a fourfold increase in the value of cryptocurrency assets.

“Had Celsius held these assets instead of sending them to 0xB1, their value would have been $1,49 billion — over $350 million more than what 0xB1 appears to have returned,” the report says.

The report concludes that “Celsius could have inadvertently ended up short of its customers’ deposited assets, let alone the interest it guaranteed them.” According to Arkham analysts, Celsius' business model was based on pocketing the spread between its returns and the interest it pays its users.”