Celsius gets sued amidst Ponzi scheme allegations

KeyFi Inc, a DeFi staking software developing firm, has filed a lawsuit against embattled crypto lending company Celsius Network over allegations of fraud while also alleging that the firm operated in a Ponzi-like manner.

Jason Stone, the CEO of KeyFi, revealed this in a long Twitter thread on July 7.

KeyFI and Celsius agreement

According to Stone’s thread, Celsius had refused to honor the terms of a 2020 agreement which saw KeyFi help the crypto lender manage and invest its customers’ funds.

A review of the court filing showed that KeyFi did not sign any formal written agreement with Celsius Network until January 2021. However, the firm had been operating as Celsius investment manager under a special purpose vehicle named Celsius KeyFi since August 2020.

At the peak of this partnership, KeyFi was helping Celsius to manage as much as $2 billion of its users’ funds, and the firm had over $800 million in assets under management as of April 2021.

Celsius lied to KeyFI

Stone revealed that Celsius had lied to him in February 2021 about hedging the investment activities of KeyFI. According to him, he discovered that Celsius “had naked exposure to the market.”

But in late Feb 2021, 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.

— 0xb1 (@0x_b1) July 7, 2022

He continued that this forced him to terminate his firm’s agreement with Celsius, which led to the unwinding of some DeFi positions and impermanent losses for the crypto lender.

Stones said Celsius initially accused him of stealing and ignored that the loss was caused by its failure to hedge against the risks of KeyFI’s trading strategies.

Ponzi-scheme allegations

The court filing alleged that Celsius Network operated in a Ponzi-like manner by luring new depositors with “double-digits interest rates.”

According to the filing,

Celsius continued to market itself as a transparent and well-capitalized business, in reality, it had become a Ponzi scheme.

The filing also stated that Celsius was actively using its customer funds to manipulate the crypto market.

(Celsius) actively (used) customer funds to manipulate crypto-asset markets to their benefit. The most egregious example of this was Plaintiff’s discovery that Celsius used customer bitcoin deposits to inflate its own crypto-asset called the “Celsius token” (CEL).

The crypto community has taken these new revelations seriously as Andrew T, a technician at Nansen, said Stone’s Twitter thread buried the lead.

This thread kind of buries the lede, if that can be believed https://t.co/qQ3ZUoHUro pic.twitter.com/GJfhGQ1pql

— Andrew T (@Blockanalia) July 7, 2022

Another community member, Dylan Leclair, referenced the court filing to say that Celsius operated as a Ponzi scheme.

Celsius operated as a Ponzi scheme. pic.twitter.com/pGC8vrH3a0

— Dylan LeClair 🟠 (@DylanLeClair_) July 7, 2022

Celsius owes Stone

Stone’s Twitter thread said that Celsius owed  “KeyFI a significant sum.” He also mentioned that he had tried to resolve this impasse severally, but there has been little success.

I have tried for over a year to quietly settle this dispute with Celsius. Pursuant to the contracts Celsius signed with KeyFi, they owe KeyFi a significant sum of money. We have been more than reasonable in attempting to resolve this with them.

— 0xb1 (@0x_b1) July 7, 2022

The court filings showed that KeyFI was supposed to get between 7.5% to 20% of profits, depending on the investment strategy.

Celsius moves WBTC to FTX

In a separate development, Celsius has moved around 25,000 units of wrapped Bitcoin (WBTC) to leading crypto exchange FTX.

Some crypto community members have speculated that the fund transfer could precede a massive market dump.

The 21,962 WBTC unlocked from paying off the remaining DAI loan has already found its way to FTX…

that didn’t take long…

Incoming $BTC dump? https://t.co/A9B9YaLQ1W#CelShortSqueeze = #CelPumpAndDump

Not your keys, not your crypto pic.twitter.com/V2edblhmXZ

— Airdawg (@Colwellinvestor) July 7, 2022

Others think the embattled firm could swap its wrapped Bitcoin for the main asset, enabling the firm to reopen its withdrawals.

The fund transfer came after the crypto lending firm had successfully paid its debts to Maker Protocol.

Since Celsius broke its radio silence on June 30, the firm and its CEO Alex Mashinsky are yet to release any new update on when withdrawals would be enabled on the platform.

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