The giant whale "0xb1" disclosed its true identity and sued Celsius for exposing the inside story of the thunderstorm
Compilation of the original text: Hu Tao & Biscuit, Chain Catcher
On July 8, the Celsius thunderstorm incident once again ushered in heavy news. Jason Stone, the former CEO of KeyFi behind the 0xb1 Twitter account, announced a formal lawsuit against Celsius, and accused the company of operating a "Ponzi scheme" while disposing of its client funds. The company has grossly mismanaged, failed to conduct basic internal audits to account for its obligations, and used client assets to manipulate the crypto asset market.
According to Jason Stone, KeyFi, the DeFi strategy deployment company he founded, was acquired by Celsius in 2020, and has since been staking and deploying DeFi strategies for Celsius. He also disclosed that the previously famous "0xb1" address was actually created by Celsius. In the early days, he was directly responsible for the management and execution of various DeFi revenue strategies, bringing profits of more than hundreds of millions of dollars to Celsius.
However, during the cooperation process, Jason Stone discovered that Celsius had many serious violations, including transferring hundreds of millions of dollars of customer deposits to the "0xb1" address for investment but lacking basic risk control measures. Previously, Celsius executives repeatedly assured him that, The company has entered into necessary hedging transactions to ensure that price fluctuations in certain crypto assets do not have a material adverse effect on the company's ability to repay depositors.
In addition, in 2020, Celsius also used about 4,500 bitcoins (currently worth $90 million) as customer deposits to purchase CELs to artificially inflate prices. Jason Stone believes that, in essence, Celsius is manipulating the CEL Token market so that it can use its huge treasury to borrow money, creating a situation where it appears that it generates more income than the amount of debt, but in fact it does not. Previously, Celsius also received a $1 billion loan from Tether.
“Because its business model depends on giving depositors more money than they put in, Celsius must constantly absorb new capital to pay its debts to existing depositors. In other words, Celsius is a Ponzi scheme.” Jason Stone wrote in the indictment.
After realizing various problems, Jason Stone decided to leave in March 2021, but Celsius has so far refused to pay them their due share of profits. "Given the public speculation about the company's solvency, and my observation that Celsius is loosely connected to the truth, I thought it prudent to finally clarify the facts. I have filed legal action against Celsius to resolve this matter once and for all."
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KeyFi (“Plaintiff”) brought suit against Celsius Network Limited (“Celsius”) and Celsius KeyFi LLC (“Celsius KeyFi”) alleging the following:
1. This action involves the defendant's refusal to perform its contractual obligation to pay the plaintiff millions of dollars owed to the plaintiff pursuant to a profit sharing agreement entered into between the parties in 2021. The controversy came to a head when plaintiffs discovered that defendants used Celsius’s customer deposits to manipulate crypto asset markets, failed to establish basic accounting controls that jeopardized those deposits, and failed to fulfill promises to induce plaintiffs to adopt various trading strategies.
2. On June 12, 2022, the problems Plaintiff discovered in March 2021 are now causing harm not only to Plaintiff, but to the hundreds of thousands of people who use Defendant's platform, as Defendant now refuses to accept its customers' claims request to recover the assets it deposited and entrusted to the defendant.
3. The defendants operated a "crypto lending platform" that accepted deposits of crypto assets from consumers seeking to earn interest on their crypto assets. The businesses of the defendants depend on their use of these asset pools to generate income by (1) lending these assets to others and (2) investing funds in the crypto market. Thus, the defendants' profits depended on them earning income that was higher than or in excess of the amount of deposits they were required to pay to consumers. Before Plaintiffs appeared in court, Defendants had no unified, organized, or comprehensive investment strategy other than to lend out the consumer deposits they had received. Instead, they're desperately looking for a potential investment that could earn them more money than they owe savers. Otherwise, they will have to use the additional deposit to pay the interest on the previous deposit, which is a typical "Ponzi scheme".
4. The recent disclosure that Celsius had no assets on hand to meet its withdrawal obligations suggests that the defendants were, in effect, operating a Ponzi scheme.
5. KeyFi, Inc. CEO and Founder Jason Stone is a pioneer in the field of modern crypto asset deployment strategies. From August 2020 to March 2021, he managed billions of dollars in crypto asset investments for the defendants.
6. Most of the time, the parties conduct business without any formal written agreement, instead acknowledging that they are in business for "mutual benefit based on mutual respect and trust." From August 2020 to March 2021, plaintiffs generated hundreds of millions of dollars in profits for the mutual benefit of both parties. These profits come in the form of transaction fees, staking token rewards, and other accretive assets. As with any investment relationship, Plaintiffs and Stone are responsible for profiting from the funds provided to them, and Celsius is responsible for ensuring that its investment strategy does not prevent it from repaying depositors in kind.
7. The relationship between the two parties began to fray when Stone discovered that the defendants not only lacked basic security controls to protect the billions of dollars in client funds they held, but that they were actively using client funds to manipulate the crypto asset market for their own benefit . The most egregious example is when the plaintiff discovered that Celsius used customer bitcoin deposits to pull market for its own encrypted asset "Celsius token" ("CEL").
8. Stone also learned of multiple incidents in which defendants failed to perform basic accounting and endangered client funds. One example included improper accounting of certain amounts owed to customers, leaving the company with $200 million in debt without even knowing how or why it owed the money.
9. These mind-boggling losses mean that billions of dollars in customer deposits cannot be returned to those customers should they demand their funds back. Celsius doesn't worry about those risks because it considers the billions of dollars in customer deposits it manages to be its property. Specifically, the terms of service on the Celsius website state that "all digital assets transferred to Celsius as part of the service are owned and held by Celsius itself." Additionally, the Celsius terms of service state that "Celsius does not hold any digital assets", but "owns, holds and/or".
10. When plaintiffs raised concerns about Celsius’s use of client funds without proper risk management, Celsius executives repeatedly assured Stone that the firm had the necessary hedging transactions in place to ensure that price fluctuations in certain cryptoassets would not material adverse effect on the company or its ability to repay depositors. Stone and his team rely on these representations when deploying certain trading strategies.
11. But these promises are lies. Despite Celsius' repeated assurances, it failed to implement a basic risk management strategy to guard against the price volatility risks inherent in many deployed investment strategies. These failures not only harmed the plaintiffs, negatively impacting profit shares, but have now resulted in Celsius refusing to accept withdrawal requests from customers.
12. The former chief financial officer of Celsius had the same concerns as plaintiffs and repeatedly raised these issues with Celsius' senior management.
13. Faced with mounting evidence of Defendant's disorganization, mismanagement, and fraud, Plaintiff concluded that he could no longer work for Defendant. In March 2021, Plaintiff notified Defendant that he was terminating the business relationship. In retaliation, defendants repeatedly refused to acknowledge Stone's resignation and then refused to pay plaintiffs their share of the profits.
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C. Celsius business model
28. Celsius is a crypto-asset lending platform that facilitates lending across a variety of crypto-assets. Celsius' business model is similar to that of a depository lender, accepting monetary deposits from consumers and then using these funds to provide liquidity to the market through loans and investments. However, in the case of Celsius, depositors surrender their crypto assets to Celsius, rather than fiat currency, in exchange for a promised interest rate.
29. Like a bank, Celsius means investing these funds responsibly, earning a return, paying depositors the interest they earn, and keeping profits. Importantly, savers will lose money if Celsius is unable to invest their money in investments that yield more than the interest they are owed. However, the core promise of the Consumer Trust is that Celsius has sufficient funds to refund crypto asset deposits to each of its users upon request.
30. Celsius' business model is designed to replicate traditional depository banks, but their terms of service try to protect them from the same liability. For example, the terms of service stipulate that any funds are not deposited in the customer's account, but become the customer's book property. Celsius can be used as you like. And, unlike traditional depository institutions, Celsius does not carry its own insurance against any loss of client funds. Celsius effectively circumvents the law by taking no responsibility for its clients' funds.
31. Celsius does not lend to consumers on a credit basis, only to retail borrowers who deposit crypto assets as collateral. For example, if a borrower wanted to borrow $10,000 against Bitcoin as collateral, they would have to deposit almost four times that amount, locked in at the lowest offered rate. Borrowers must also maintain certain loan-to-collateral ratios or Celsius will liquidate the collateral to secure the loan. This is not the same as margin calls at traditional stockbrokers.
32. Like many other encrypted asset businesses, Celsius issued its own encrypted asset in March 2018, and the Token was named "CEL". The way Celsius promotes the use of its CEL Token is to choose to receive interest payments from Celsius in the form of CEL Token, at a higher rate than deposits paid by Celsius in other ways. Likewise, customers who use CEL to repay their loans are charged lower interest rates. Crucially, all of Celsius' balance sheets are on a U.S. dollar basis for business operations. Therefore, if the price of CEL tokens rises, Celsius can pay customers less CEL Tokens as interest.
33. Due to the growing demand for crypto-lending platforms, Celsius has grown enormously in custody of deposits for its consumers. Indeed, just a few months before this filing, Celsius held more than $20 billion worth of crypto asset deposits.
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D. Celsius recruits Stone and his team to manage its client deposits
35. In the summer of 2020, Celsius approached and courted its crypto asset trading team.
36. Jason Stone is the founder and CEO of KeyFi, a technology company focused on DeFi deployments and related strategies. Stone and his team have had great success in the DeFi space and have been successful in deploying profitable DeFi strategies. The founders of Celsius knew Stone well. In late 2019 and early 2020, Alex Mashinsk (founder and CEO of Celsius) and Nuke Goldstein (co-founder and CTO of Celsius) invested tens of thousands of dollars in KeyFi.
37. In 2020, Stone had several discussions with Mashinsky and other Celsius managers about the possibility of deploying advanced strategies using KeyFi's expertise. Make money from customer deposits. That summer, plaintiffs KeyFi and Celsius struck a handshake agreement that would see KeyFi manage billions of dollars in crypto deposits from Celsius customers.
38. On or about August 19, 2020, Celsius began transferring hundreds of millions of dollars in crypto assets to Stone and his team without a formal agreement. Celsius created a new Ethereum wallet address called the "0xb1" account, and Stone will deploy almost all assets transferred by Celsius to this address.
39. At all times Celsius maintained full control of the 0xb1 account; indeed, Stone had only access to the 0xb1 account for most of the time he worked with Celsius. Log in to a Celsius-controlled computer account already logged into 0xb1 by using a VPN.
40. Shortly after, the Celsius platform gave Stone direct access to 0xb1's account. The reason for this was a "DNS attack" by hackers on the service provider GoDaddy.com. During the hack, which affected all of Celsius's cloud infrastructure and environments, Celsius and KeyFi feared that hackers could completely hijack all of Celsius' network traffic. Therefore, in order to protect the 0xb1 account, Celsius provided Stone with the private key of the 0xb1 account so that he could access the account smoothly without using a VPN.
41. All deposit and transaction history related to the 0xb1 account can be found atView on Etherscan。
42. Despite the staggering value of the assets transferred and the parties' intention to share the profits generated by the assets, there was no formal written agreement between the parties. This is equivalent to Celsius continuing to transfer hundreds of millions of dollars to Stone, entrusting Stone and his team to invest, all based on the handshake agreement between the two parties.
43. In addition to transferring cryptographic assets to Stone for investment, Celsius conducted certain transactions in Stone's name without transferring the assets to Stone's control. The parties agreed to record gains and losses from such transactions on KeyFi's income statement for the purpose of calculating KeyFi's and Stone's share of profits.
44. This strategy makes sense because Stone and all the encrypted assets it deploys are provided by Celsius; therefore, it is important whether Token is actually transferred before KeyFi is deployed. This strategy also reflects the relationship between the two. The two parties are trusting and trusted parties, the two parties rely on each other, and the funds allow both parties to benefit from each other.
45. In October 2020, Celsius and Stone decided that engaging in certain DeFi transactions required proper risk management and hedging against changes in cryptoassets caused by rising token prices. Specifically, Celsius’ management told Stone that it would monitor Stone’s DeFi activity and deploy certain hedging strategies that could protect against prices. This is because Stone's DeFi strategy is based on Ethereum depositing a large amount of ETH and investing it in a DeFi project that may return, obtaining non-ETH-denominated assets.
2. The Celsius / KeyFi Memorandum of Understanding (The Celsius / KeyFi MOU)
46. KeyFi's investment strategy is very profitable. Therefore, on or about October 1, 2020, Celsius Network and KeyFi jointly managed user funds for more than one month. KeyFi has entered into a Memorandum of Understanding (“MOU”) in which they strive to achieve a collaborative structure in which KeyFi will provide DeFi strategies and its employees with special access to Celsius.
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55. The special relationship is one of mutual respect and trust. Because of their high risk and unusual circumstances in the business. Celsius had transferred hundreds of millions of dollars (before the MOU) to Stone and his team without any form of formal written agreement.
56. For its part, KeyFi has agreed to devote all of its resources to capture all crypto-financing opportunities to manage Celsius’ investments, all without any formal safeguarding documentation. Among other things, KeyFi relies on Celsius to deploy necessary hedging strategies that complement KeyFi's investment strategy and protect KeyFi from losses on customer deposits due to price fluctuations in the relative value of traded crypto assets. Of course, KeyFi trusts its new business partner Celsius to generally conduct its business with integrity.
3. Asset Purchase Agreement and Service Agreement
57. Given Stone's success in managing Celsius customer deposits. Celsius was apparently so happy with Stone's management that they decided to (1) continue to send funds to Stone for weekly deployments and (2) move forward with formalizing the agreement envisioned in the MOU. Finally, on or about December 31, 2020, a series of two contracts drafted by Celsius formalized the partnership between KeyFi and Celsius: the Asset Purchase Agreement (“APA”) (as Exhibit A) and the Services Agreement ( as Annex B).
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i. APA purchase price
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ii. Calculation of Remuneration Payments
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65. Net profit is defined in APAs and service agreements as a function of gross profit margin in dollars from all activities less certain costs and overhead. Celsius violated the APA and the Service Agreement by refusing to provide KeyFi with an accounting and fee for such charges. However, KeyFi estimates that net of such costs and expenses, the gross profit distributable to the parties exceeds $838 million.
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E. Celsius fails to hedge Stone's DeFi activity
67. Celsius disputes that KeyFi received any profit from the failure of Celsius to protect itself from the risk of crypto asset appreciation. Customers of Celsius provide it with encrypted assets and expect to receive them back in the same form. Celsius offers similar assets to Stone and KeyFi to invest in, but with profits assessed in U.S. dollars. This creates a risk for Celsius that KeyFi may make a dollar profit on it, but, if the crypto asset is worth, it may not be able to profitably buy back the underlying crypto asset.
68. For example, Celsius provided 100 ETH to KeyFi with a total value of $100,000 (assuming $1,000 each ETH), and KeyFi’s return on investment consisted of 50 ETH and other tokens with a total value of $150,000, no doubt , which would constitute a profitable dollar investment. However, if during the same period, the ETH price rises to $1,250 per token, Celsius needs to convert its dollar investment into ETH, and it has to use some of those dollar profits to do so. If the ETH price rises further, it may exceed profits and require Celsius to use its own funds to buy ETH. This potential risk, a product of Celsius' relationship with its customers, needing to be returned to them while funds of the kind deposited were not addressed in the agreement between the parties and therefore remain with Celsius.
69. At all times, there was a simple solution to this risk: Celsius used futures contracts to hedge when supplying cryptocurrency to Stone and KeyFi. In other words, if Celsius had bought calls on the spot on the price of each token it offered to Stone and KeyFi, this would have completely avoided risky asset appreciation eroding Celsius' dollar profits.
70. Indeed, Celsius is aware of this risk and the solution. Celsius told Stone that it is tracking its DeFi activity, balancing risk through various hedging strategies, and that such transactions are considered “approved activity” when executing that strategy.
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F. Stone Learns of Celsius' Serious Mismanagement of Its Client Funds
76. In January 2021, before and after the signing of the APA and service agreement, KeyFi was appalled by Celsius' inappropriate business practices and ultimately concluded that Celsius' business practices were so corrupt that he and KeyFi could no longer do business with Celsius. Three findings by Stone formed the basis of his decision to step down as CEO of KeyFi:
77. First, KeyFi became aware that, since at least February 2020, Celsius had engaged in a series of transactions designed to artificially inflate the price of CEL tokens. Connor Nolan, Director of Token Deployment at Celsius, told KeyFi that between February 2020 and November 2020, Celsius used approximately 4,500 bitcoins (currently valued at $90 million) on the open market as customer deposits to purchase CEL at an artificial Raise the price.
78. The purpose of the scheme was both fraudulent and illegal: Celsius induced customers to pay in CEL by offering them a higher interest rate. Then, by deliberately and artificially inflating the price of CEL, Celsius was able to pay even less crypto assets to those customers who chose to receive interest in CEL.
79. Furthermore, by artificially inflating the price of CEL, Mashinsky - who personally owned hundreds of millions of dollars worth of CEL at its peak - was able to enrich himself enormously.
80. The scenario also shows that CELs are in high demand and traded. Celsius used this artificial demand to convince lenders that the CELs it held in its treasury were a liquid, marketable asset that could be used as collateral for loans to Celsius. Celsius uses these loans to pay customers interest and to provide customers with loans backed by cryptocurrency collateral. These loans are critical to Celsius' continued operations as Celsius is still struggling to grow its own profits. Essentially, Celsius was manipulating the CEL market so that it could borrow from its vast treasury to create a situation where it appeared to be generating more than it owed customers, when in fact it was not.
81. Second, Stone realizes that Celsius has lied to him about the existence of hedge transactions designed to hedge Stone's ongoing authorized DeFi transactions. The failure of Celsius to implement the promised hedging deal hurt more than Stone and KeyFi. Stone learned that Celsius had failed to properly hedge all of its profitable activity, exposing other customer deposits (ie not managed by the SPV) to potential multi-billion dollar losses.
82. Third, Stone learned of further financial mismanagement, which threatened to push the company into bankruptcy. As noted above, Celsius pays a portion of the interest on CEL deposits, as well as a portion of interest on other crypto assets such as Bitcoin and Ethereum. For consumers who choose to pay with their deposited crypto assets (rather than CEL Token), Celsius recorded these liabilities on its books in US denomination between 2018 and 2020, even though it paid customers in the underlying Token. Then, as crypto assets appreciated in value, it failed to mark-to-market those assets in its internal books, creating a huge hole in its accounting.
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G. Ponzi scheme
84. In January 2021, a bull cycle began in the crypto market, causing Celsius (who recklessly and fraudulently failed to hedge its investments) to suffer severe exchange rate losses.
85. In January 2021, the price of ETH rose by more than 50% in just a few days and continued to climb in the following weeks.
86. Celsius has huge debts to ETH-denominated depositors, but its ETH holdings are not equal to those debts. Instead, Celsius empowered DeFi strategies, resulting in assets moving from ETH to other cryptocurrencies, and (inexplicably) failing to hedge this well-known risk.
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H. Jason Stone resigns; Celsius refuses to pay
88. By March 2021, it became clear to KeyFi that Celsius lied about implementing the hedge, a mistake that could be financially damaging to Celsius and its consumers. It may also cause irreparable damage to KeyFi's reputation.
89. At that time, Celsius had already missed the first payment due to KeyFi within 15 days of December 31, 2020 (“Profit Payment”), and had never paid any profit owed to KeyFi or the SPV. Furthermore, the defendants had no intention of paying the required profits under the MOU, APA, and service agreement. While Stone has been authorized to purchase NFTs as an advance payment for a profit share under the MOU, APA, and service agreement, Celsius was unable to provide specifics on the total profit share.
90. On March 9, 2021, Stone notified Celsius that he would no longer be CEO of Celsius KeyFi.
91. After Stone left Celsius KeyFi, Celsius continued to access and control the 0xb1 wallet. Celsius CEO Alex Mashinsky used that control for his own personal gain. In one instance, the CEO of Celsius transferred valuable non-financial assets from the 0xb1 account to his wife's wallet.
92. According to information, since Stone's resignation, Celsius has not found other value-added acquisitions that can compensate for the high interest rates it offers to depositors. Because its business model depends on giving savers more money than they put in, Celsius has to constantly take in new capital to pay its debts to existing savers. In other words, Celsius is a Ponzi scheme.
93. For example, Celsius was required to obtain a loan of approximately $1 billion from Tether in order to pay its growing debt. While Celsius paid 5%-6% interest on the $1 billion loan, it owed customers significantly more because it accepted many popular tokens as deposits:
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J. Celsius suspends customer withdrawals due to mismanagement
99. On June 12, 2022, Celsius announced: Due to extreme market conditions, today we are announcing that Celsius is suspending all withdrawals, transactions, and transfers between accounts. We are taking this action today to enable Celsius to better meet its exit obligations over time.
100. Celsius took this drastic action because it didn’t have (and still doesn’t have) enough crypto assets on hand to meet the debts it owed customers.
101. Just days before that announcement, on June 7, 2022, Celsius claimed that it “has sufficient reserves (and sufficient ETH) to meet its obligations under our comprehensive liquidity risk management framework.” It turned out to be a lie. The lie also fits (as above) the representations made to plaintiffs regarding their risk management.
103. Goldman Sachs is reportedly seeking to acquire Celsius' assets for a low price of $2 billion (customer deposits worth ~$11.8 billion as of May 17, 2022). To be clear, under the Celsius Terms of Service, Celsius claims that these common consumer-provided assets are its property and are not held on behalf of any client. Any such asset purchases therefore risk wiping out customers' deposits to pay Celsius' own lenders.
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