New York Attorney General Sues Founder Of Celsius Network On Crypto Loan Fraud

The founder of Celsius Network, Alex Mashinsky, has been sued on charges of fraud. (photo: dock. coinrivert)

JAKARTA - New York's attorney general on Thursday 5 December sued Celsius Network founder Alex Mashinsky on charges of defrauding investors from billions of dollars in digital currency by hiding failed health from the now bankrupt cryptocurrency loan platform.

Mashinsky insisted on promoting Celsius as a safe alternative to banks, paying 17% high interest on deposits, while hiding hundreds of millions of dollars in losses in risky investments. This was revealed in a lawsuit filed by NYC attorney general Letitia James.

This civil lawsuit seeks to prohibit Mashinsky from doing business in New York and asks him to pay compensation for violating laws including the state's Martin Act, which gives James broad powers to pursue securities fraud cases.

"Alex Mashinsky promised to lead investors towards financial freedom but instead took them to a path of financial destruction," James said in a statement. "Making false and baseless promises and misleading investors is illegal."

Neither Mashinsky nor his lawyers immediately responded to a request for comment from Reuters on James' remarks. Celsius itself was not a defendant in a lawsuit filed in a Manhattan state court.

This Crypto lender gained popularity during the COVID-19 pandemic by promising easy access to loans and high interest rates to deposits. They then lend tokens to institutional investors, hoping to profit from the difference.

However, the business model proved to be often unsustainable in 2022 after selling on the cryptocurrency market, including the fall of TerraUSD and Luna tokens.

The lawsuit against Mashinsky is the government's latest attempt to address risky crypto practices.

This follows federal criminal charges filed last month accusing FTX crypto exchange founder Sam Bankman-Fried of widespread fraud. He pleaded not guilty to the charges.

James' lawsuit adds to the fear factors this industry may face, where the money is very tight and the capacity to absorb a large fine will be much more limited, said Yesha Yadav, dean at Vanderbilt Law School in Nashville, Tennessee.

"The absence of a comprehensive federal framework to regulate crypto releases James to take on the role of aggressive enforcement", Yadav added, quoted by Reuters.

Celsius filed for protection of Chapter 11, namely bankruptcy from creditors on July 13, 2022, for recording a deficit of USD 1.19 billion (IDR 18.4 trillion) on its balance sheet.

The bankruptcy filing comes a month after the Hoboken-based company New Jersey freezes withdrawals and transfers for its 1.7 million customers, citing "extreme" market conditions.

According to a lawsuit in court, Celsius ended last November with an obligation of US$9 billion (Rp139.8 trillion), including more than US$4.3 billion (Rp66.8 trillion) debt to customers.

James said Mashinsky's scam lasted from 2018 to June 2022, when deposits were frozen, with more than 26.000 New Yorkers being victims.

Many victims are ordinary investors, such as father of three who lost his life savings of $375.000, and a veteran who has been disabled and lost $36.000 he has tubed for nearly a decade.

Born in Ukraine and then migrated to Israel with his family, Mashinsky started many businesses before establishing Celsius in 2017, such as being chief executive.

James said his promotional attempts through social media, interviews, and cryptocurrency conferences helped the company raise USD 20 billion in digital assets early last year. But because they struggled to pay the promised returns to investors' deposits, Celsius allegedly moved to more risky investments.

The lawsuit said that within two weeks of freezing the recall, Mashinsky was still dismissing criticism that Celsius was too excessive, urging investors to "ignor the FUD", abbreviation to "frightness, uncertainty, and doubt".

In September, US Bankrupt Judge Martin Glenn appointed an examiner to investigate whether Celsius mismanagement, after a federal trustee said appointment could help "tralisate inherent distrust" in the company between creditors and customers.

Mashinsky stepped down as chief executive Celsius in September, saying at the time he was committed to helping return deposits to investors.