Former CEO of crypto firm Celsius charged with fraud

The backstory: Back in 2017, Celsius Network entered the cryptocurrency scene, capturing attention by offering investors impressive yields and loan options. Basically, they could deposit their crypto with Celsius to earn a percentage while also being able to take out cash loans if they put that crypto up as collateral. It was a roaring success, especially during the pandemic when crypto prices were blowing up. But things took a turn in 2022. As crypto suddenly plummeted, panic spread among Celsius customers, resulting in a massive wave of withdrawals. Caught off guard (and without the liquidity to honor these withdrawals), the company froze transactions and eventually filed for bankruptcy, leaving many customers unable to get their money back.

Celsius wasn’t the only crypto player feeling the heat at the time. Other major companies collapsed, revealing a bunch of potential cases of fraud. The government acted fast, targeting these companies and their founders. Take Sam Bankman-Fried, the founder of the FTX platform, for example. He was arrested in December over allegations of orchestrating a massive financial fraud.

More recently: In September, Alex Mashinsky, the former CEO of Celsius, resigned from his position, saying his leadership had become an "increasing distraction."

But, in January, New York prosecutors sued Mashinsky. The allegations said he defrauded investors, resulting in billions of dollars in losses at Celsius, eventually leading to its bankruptcy. Prosecutors said Mashinsky deceived customers by telling them Celsius was a safe and more lucrative investment compared to traditional banks when really the company was using deposits in risky crypto-lending investments and hiding its losses.

The development: This year, Mashinsky has faced multiple lawsuits from several US regulatory agencies, and he was arrested in New York last Thursday, where he pleaded not guilty to fraud charges. The allegations against him involve misleading customers and artificially inflating the value of Celsius' native crypto token, CEL. The indictment revealed that Mashinsky and another Celsius exec face seven criminal counts, including securities fraud, commodities fraud and wire fraud. They’re looking at decades in prison if they’re convicted.

On another note, Celsius reached a settlement of US$4.7 billion with the US Federal Trade Commission, which won’t be collected until after the company’s paid back its creditors and investors.

Key comments:

“Mashinsky portrayed Celsius as a modern-day bank, where customers could safely deposit crypto assets and earn interest,” said the indictment. “In truth, however, Mashinsky operated Celsius as a risky investment fund, taking in customer money under false and misleading pretenses and turning customers into unwitting investors in a business far riskier and far less profitable than what Mashinsky had represented.”

“Alex vehemently denies the allegations brought today,” said Mashinsky’s counsel Jonathan Ohring to CNBC. “He looks forward to vigorously defending himself in court against these baseless charges.”

"Whether it's old-school fraud or some new-school crypto scheme, it doesn't matter one bit. It's all fraud to us," said US Attorney Damian Williams at a press conference detailing the charges.