Alex Mashinsky Arrested:- Alex Mashinsky, the founder and former CEO of Celsius Network, a popular crypto lending platform, was arrested on July 13, 2023, by US authorities on multiple charges of fraud and securities manipulation. He was also sued by four federal agencies: the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Trade Commission (FTC), and the Department of Justice (DOJ).
Mashinsky is accused of lying to investors and customers about the safety, profitability, and sustainability of Celsius Network, as well as artificially inflating the price of its native token, CEL. He allegedly pocketed $42 million from the scheme, while leaving Celsius Network with more than $1 billion in debt and thousands of customers unable to withdraw their funds.
This article will provide an overview of the charges against Mashinsky, the background of Celsius Network’s collapse, and the implications for the crypto industry.
The Charges Against Alex Mashinsky
According to the DOJ’s indictment, Mashinsky faces seven criminal counts, including:
- Securities fraud
- Commodities fraud
- Wire fraud
- Market manipulation
- Fraud in connection with a digital asset
- Fraud in connection with a digital asset offering
- Conspiracy to commit fraud
Each count carries a maximum sentence of 20 years in prison, except for conspiracy, which carries a maximum sentence of five years.
The SEC’s complaint alleges that Mashinsky violated the antifraud provisions of the federal securities laws by making false and misleading statements about Celsius Network’s business model, revenue sources, risk management, and regulatory compliance. The SEC also claims that Mashinsky manipulated the price of CEL by using fake accounts, wash trading, and market orders to create artificial demand and inflate its value.
The CFTC’s complaint alleges that Mashinsky engaged in fraudulent and deceptive conduct in connection with Celsius Network’s offering and trading of CEL, which the CFTC considers a commodity. The CFTC also accuses Mashinsky of failing to register Celsius Network as a futures commission merchant or a swap dealer, as required by law.
The FTC’s complaint alleges that Mashinsky violated the FTC Act by deceiving consumers about the nature and risks of Celsius Network’s services. The FTC also alleges that Mashinsky breached his fiduciary duty to Celsius Network by diverting funds for his personal benefit.
The four agencies are seeking various forms of relief, including injunctions, disgorgement, restitution, civil penalties, and criminal prosecution.
The Background of Celsius Network’s Collapse
Celsius Network was founded in 2017 by Mashinsky, a serial entrepreneur and inventor who claimed to have over 35 patents in fields such as Voice over Internet Protocol (VoIP) and blockchain. Celsius Network’s vision was to create a platform that would allow users to earn high-interest rates on their crypto deposits by lending them out to institutional borrowers.
Celsius Network also issued its own token, CEL, which was supposed to represent a share of the platform’s revenue and governance rights. Users who held CEL could receive higher interest rates and lower fees on their deposits and loans.
Celsius Network quickly gained popularity among crypto enthusiasts who were attracted by its high rewards rates and user-friendly interface. By 2020, Celsius Network claimed to have over 500,000 users and over $10 billion in assets under management.
However, behind the scenes, Celsius Network was facing serious financial and operational challenges. According to the regulators’ allegations, Celsius Network was not transparent about how it used its customers’ funds or how it generated its revenue. Instead of lending out its customers’ crypto to reputable institutions with adequate collateral and risk management, Celsius Network allegedly engaged in risky and speculative trading activities that resulted in hundreds of millions of dollars in losses.
Moreover, Celsius Network allegedly paid out most of its revenue to Mashinsky and his associates, rather than to its customers or token holders. Mashinsky allegedly used his control over CEL’s supply and demand to manipulate its price and enrich himself at the expense of other investors.
The situation worsened in late 2022, when the crypto market experienced a sharp downturn and several major events shook the industry. One of them was the collapse of TerraUSD (UST), a stablecoin that was supposed to be pegged to the US dollar but lost its peg due to a technical glitch. Celsius Network had reportedly invested heavily in UST and suffered significant losses when its value plummeted.
Another event was the hack of KuCoin, one of the largest crypto exchanges in Asia. KuCoin reported that hackers stole over $200 million worth of crypto from its hot wallets, including CEL tokens. KuCoin froze all withdrawals and deposits on its platform until it could secure its funds and identify the perpetrators.
These events triggered a wave of panic and uncertainty among Celsius Network’s customers, who tried to withdraw their funds from the platform. However, Celsius Network was unable to process the withdrawals due to its liquidity crunch and technical issues. Many customers reported that their withdrawal requests were either delayed, canceled, or rejected by Celsius Network.
As the situation escalated, Celsius Network announced on December 15, 2022, that it was filing for Chapter 11 bankruptcy protection in the US. The company said that it was working with its creditors and investors to restructure its debt and resume its operations. However, many customers and token holders were left in the dark about the status of their funds and the future of the platform.
The Implications for the Crypto Industry
The arrest and lawsuits against Mashinsky are among the most high-profile cases of crypto fraud and regulation in recent history. They also highlight some of the challenges and risks that the crypto industry faces as it grows and matures.
One of the challenges is the lack of clarity and consistency in the regulatory framework for crypto assets and platforms. Different jurisdictions and agencies have different definitions and classifications of crypto assets, such as whether they are securities, commodities, currencies, or something else. This creates confusion and uncertainty for both crypto businesses and consumers, who may not know what rules and regulations apply to them or how to comply with them.
Another challenge is the lack of transparency and accountability in the crypto industry. Many crypto platforms operate in a decentralized and anonymous manner, which makes it difficult to verify their claims, track their activities, or hold them responsible for their actions. This also creates opportunities for fraudsters and scammers to exploit the trust and ignorance of unsuspecting users.
A third challenge is the lack of consumer protection and education in the crypto industry. Many crypto users are not aware of the potential risks and pitfalls of using crypto platforms, such as hacking, theft, loss, volatility, or default. They may also not have access to adequate information or resources to make informed decisions or seek recourse in case of problems.
The arrest and lawsuits against Mashinsky may serve as a wake-up call for the crypto industry to address these challenges and improve its standards and practices. They may also prompt more regulatory scrutiny and enforcement actions from authorities who want to protect consumers and investors from fraud and abuse.
