Celsius Slammed With Fraud Lawsuit From its Former Money Manager

Struggling cryptocurrency lending company Celsius has been accused by staking software firm KeyFi, of fraud, mismanagement of customers’ deposits, and failure to honor an agreement between both parties in a lawsuit filed in New York.

Lawsuit Accuses Celsius of Operating a Ponzi Scheme

Jason Stone, the founder of KeyFi, alleged that Celsius used customers’ funds to manipulate the price of its cryptocurrency token CEL and operated a Ponzi scheme. According to the lawsuit, Celsius’ inability to fulfill withdrawal obligations was an indication that the platform was a Ponzi.

“As customers sought to withdraw their ether deposits, Celsius was forced to buy ether in the open market at historically high prices, suffering heavy losses. Faced with a liquidity crisis, Celsius began to offer double-digit interest rates in order to lure new depositors, whose funds were used to repay earlier depositors and creditors.”

In a long Twitter thread by decentralized finance (DeFi) account 0xb1 where Stone announced his identity, the KeyFi CEO said that the Oxb1 address was created in August 2020 to enable Celsius to send customers’ deposits for KeyFi to manage and invest.

Before both parties went their separate ways, Stone said KeyFi managed almost $2 billion in assets, with the value of the asset under management (AUM) increasing to over $800 million by April 2021. Interestingly, the court document revealed that KeyFi and Celsius worked together “without any formal written agreement.”

While managing customers’ funds, Celsius assured KeyFi that the risk management team monitoring the latter’s investment activities was “hedging any potential impermanent loss from our activities in liquidity pools.”

However, Stone stated that the team discovered later in February 2021 that Celsius did not keep to their word. According to the KeyFi chief:

“We discovered Celsius had lied to us. They had not been hedging our activities, nor had they been hedging the fluctuations in cryptoasset prices. The entire company’s portfolio had naked exposure to the market.”

Celsius Pays Off Remaining MakerDAO Debt

Celsius’ perceived dubious operations caused KeyFi to terminate its relationship with the crypto lending platform. The KeyFi founder also noted that Celsius suffered an impermanent loss (IL) after the firm exited its DeFi positions, thereafter blaming Stone for the IL.

Furthermore, Stone said that Celsius owes KeyFi a significant sum of money without stating the amount. The KeyFi CEO said he filed the lawsuit after failing to quietly settle with Celsius for over one year. Part of the thread states:

“Given the public speculation about the company’s solvency and my observation of Celsius’ loose relationship with the truth, I feel it is only prudent to finally set the record straight. I have brought legal action against Celsius to settle this issue once and for all.”

While Celsius has not made any official statement regarding the lawsuit, the latest development comes nearly a month after the lending firm halted withdrawals.

Celsius later hired restructuring lawyers to help sort out its financial predicament. As recently reported by CryptoPotato, the Celsius network paid off the remaining $41.2 million of its debt to MakerDAO, causing Maker to release 21,962 wrapped bitcoins (WBT) worth $448 million.