Celsius was one of the top lenders in the crypto ecosystem during the 2021 bull market. At its peak, it served 1.7 million customers and managed $25 billion in assets.
All of that collapsed in June 2022 amid major flaws in the company's work structure.
The bear market in 2022, especially the implosion of the Terra ecosystem in May, exposed the fragile business model of Celsius, which relied heavily on its native CEL (HE) token and the high staking rewards it offered.
The price of CEL fell sharply in June after the crypto lenders' relationship with Terra went public, followed by Celsius sending large amounts of funds off the platform and pause user withdrawals.
Just a month later, on July 14, the troubled company filed for Chapter 11 bankruptcy. At the time of filing, it was approximately $2.7 billion in debt.
On June 16, 2022, securities regulators in five US states opened an investigation into Celsius. The company's former CEO, Alex Mashinsky, he finally resigned from his position on September 27 amid rumors that he was attempting to flee the United States.
By late 2022, the US Department of Justice, the Commodity Futures Trading Commission (CFTC), the Federal Trade Commission (FTC), and the Securities and Exchange Commission had begun investigating the Celsius crash and Mashinsky's role in it.
Mashinsky faces criminal charges
The first significant blow to the troubled crypto lender came on July 5, 2023, when the CFTC concluded its investigation and alleged that Celsius and Mashinsky had violated various US regulations and misled investors.
On July 13, the SEC filed a complaint against Celsius and Mashinsky, accusing them of violating securities laws by raising billions of dollars through fraudulent and unregistered offerings. The FTC also fined Celsius $4.7 billion and ceased business operations.
On the same day, the Department of Justice accused the former CEO with "securities fraud, commodity fraud, and wire fraud for defrauding customers and misleading them about the core aspects of the company he founded."
Former Celsius chief revenue officer Roni Cohen-Pavon and Mashinsky are "further charged with conspiracy, securities fraud, market manipulation and wire fraud for unlawfully manipulating the price of CEL, Celsius' proprietary cryptographic token, while secretly selling their own CEL tokens at artificially inflated prices."
Damian Williams, the US attorney for the Southern District of New York, said his office is not seeking charges against Celsius, specifically, adding that it has reached a non-prosecution agreement with the firm as it "accepted responsibility for its role in the fraudulent schemes" and is helping clients recover funds.
Mashinsky was arrested and released on $40 million bail later the same day.
Former Celsius CEO Alex Mashinsky has been arrested following an investigation into the company's collapse. The SEC sued both Mashinsky and the bankrupt crypto lender in a New York court https://t.co/KgIYS487Zo
โBloomberg Crypto (@crypto) July 14, 2023
With these charges and enforcement actions, Celsius and its former executives have joined the growing list of crypto companies that will fall under the microscope of US regulators in 2023.
A lawsuit against Binance accuse the exchange of offering unregistered securities and being mismanaged internally. Another against Coinbase alleges that the exchange offered broker services for unregistered securities without a license.
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This series of so-called โregulation via appโ has led many market insiders to argue that regulators need to be clearer in their approach to the crypto industry.
Mriganka Pattnaik, CEO of crypto compliance service provider Merkle Science, told Cointelegraph:
โThe US regulatory response remains uncertain, but the allegation may have far-reaching implications for the cryptocurrency industry. Allegations of wire fraud, securities fraud, and price gouging raise concerns about similar activities at other crypto firms, which could influence regulators to increase their monitoring and enforcement efforts.
โMoving forward, the Celsius case will likely lead to more serious legal and financial consequences for non-compliant cryptocurrency companies,โ he said.
Prosecuting bad actors is a boon for the crypto industry
Many cryptocurrency advocates believe that the prosecution of the former Celsius CEO could be good for the cryptocurrency industry. Punishing bad actors sends a clear message that fraud will not be tolerated, even if it is committed under the guise of a relatively unregulated industry.
Yamina Sara Chekroun, US head of legal at Web3 payment infrastructure firm Ramp, told Cointelegraph: โThe consumer-facing actions of regulators should be applauded in light of the devastating losses users have suffered in the past two months as a result of mismanagement and a general lack of standardized requirements for risk disclosure.โ That being said, we must continue to respect due process, whether on Wall Street or in crypto."
Kadan Stadelmann, CTO of open source blockchain technology provider Komodo, believes that regulators will likely want to set an example with Celsius and other companies that allegedly broke the law, especially those that operate in the United States. However:
"The recent spate of cryptocurrency-related prosecutions will ultimately help the industry evolve to a point where users don't have to worry about the safety of their crypto assets from potential misuse or theft by individuals."
Adam Ettinger, a partner at law firm FisherBroyles, told Cointelegraph that crypto lenders and fintech companies that defraud investors, lie about their financial products, or manipulate markets should expect enforcement actions.
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โIf the misconduct is egregious enough, executives can face criminal charges and arrest. My hope is that fewer cryptocurrency companies will 'face the heat' because the bad actors are already gone or perished, and those who might have considered fraud will pick up on the app activity and fly well,โ he added.
Most of the litigation against accused bad actors has come after ecosystem implosions and losses, which have proven disastrous for many consumers and cast a shadow of doubt over the entire ecosystem. Therefore, actions by regulators against such bad actors often become the last hope for investors and consumers to recover part of their funds.
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