On Thursday, a lawsuit was filed against prominent crypto lender Celsius Network by its former investment manager. The crypto lender was accused of using customer deposits for inflating the price of the platform’s own digital token and for not hedging risks properly, which drove it to freeze access to customer assets.
Jason Stone, the former investment manager for Celsius, who is now running KeyFi Inc., filed the complaint. It alleged that the crypto lender had been running a Ponzi scheme that was aimed at benefitting itself and customer deposits had been grossly mismanaged. The lawsuit alleged that the plaintiff was defrauded into offering services worth millions of dollars and had not been paid for them.
The lawsuit was filed in Manhattan’s New York state court and is seeking unspecified punitive and compensatory damages. Celsius did not immediately comment on the lawsuit.
Celsius under pressure
The accusations from Stone come at a very bad time for Celsius Network, as it is already under a great deal of pressure because of the falling prices in the cryptocurrency market. On June 12th, the crypto lender had taken the entire market by surprise when it announced that its 1.7 million customers would no longer be able to make withdrawals or transfers via its platform because it was freezing them due to the extreme conditions of the market.
Based in New Jersey, the company had then availed the services of legal and financial advisers for restructuring purposes. Reports indicated that the company could also file for bankruptcy. This week, another crypto lender called Voyager Digital filed for bankruptcy, while 3AC, the crypto hedge fund had also begun liquidation proceedings in the previous month.
How Celsius worked
Celsius Network functions in a way similar to traditional banks, as it provides customers with returns, which can go as high as 19%, on the crypto assets they deposit with the company. However, Stone stated that Celsius had not been able to pay off its investors because it did not engage in proper hedging strategies. Therefore, it recorded ‘severe’ losses when the prices of cryptocurrencies had begun to plunge.
In addition, Stone accused Celsius of recording some of the deposits in US dollar denominations instead of doing them in the form of bitcoins, or other tokens that were received. He asserted that this had resulted in a hole worth $100 million to $200 million that Celsius had not been able to fix.
The KeyFi deal
KeyFi was founded by Stone, which is a crypto trading strategy company. He said that the company and were working together without a written agreement. It stated that a share of profits would be given to KeyFi from the returns of the crypto assets worth billions of dollars that the lending platform would accumulate for investment purposes.
Stone said that $838 million had been generated in profits and KeyFi was eligible for getting 20% of these returns. But, they decided to quit the relationship last year because of the company’s lack of hedging.