A significant development in the cryptocurrency industry occurred on Thursday when Alex Mashinsky, the founder and former CEO of the now-bankrupt cryptocurrency lender Celsius Network, was arrested and charged with multiple counts of fraud by a U.S. prosecutor in New York. Concurrently, Mashinsky and his company were sued by three federal regulatory agencies.
The 57-year-old entrepreneur faces a total of seven criminal charges, including securities fraud, commodities fraud, and wire fraud. Roni Cohen-Pavon, Celsius' ex-chief revenue officer, was also indicted, facing four criminal charges according to the unveiled indictment.
The accusation at the heart of these proceedings is that Mashinsky misled customers and artificially inflated the value of the proprietary crypto token of his Hoboken, New Jersey-based company. His arrest marks yet another blow for the beleaguered cryptocurrency industry, which has been rocked by a slump in crypto prices leading to the collapse of several prominent companies.
The tumultuous wave of fraud allegations is not limited to Mashinsky. Last year, Sam Bankman-Fried, founder of the fallen crypto exchange giant FTX, was also charged with fraud, to which he has pleaded not guilty. U.S. Attorney Damian Williams was unambiguous in his statement, "Whether it’s old-school fraud or some new-school crypto scheme, it doesn’t matter one bit. It’s all fraud to us."
Celsius Network was established in 2017 and filed for Chapter 11 bankruptcy protection in July 2022 after customers sought to withdraw their deposits amid falling crypto prices. Many customers have since been unable to access their funds.
Crypto lenders like Celsius experienced rapid growth as crypto prices soared during the COVID-19 pandemic. These lenders promised straightforward loan access and incredible interest rates to depositors while loaning tokens to institutional investors with hopes of profiting from the difference.
The prosecution alleges that Mashinsky and Cohen-Pavon engaged in market manipulation of Celsius’s proprietary crypto token, Cel. Additionally, the indictment cites a fraudulent scheme to manipulate the price of the cryptocurrency and wire fraud related to the manipulation of the token.
Adding to these charges, it's alleged that Mashinsky pocketed approximately $42 million from selling his holdings of the Cel token.
Moreover, the U.S. Securities and Exchange Commission (SEC) has also sued Mashinsky and Celsius. The lawsuit alleges that the pair raised billions of dollars through the sale of unregistered crypto securities and deceived investors about the financial state of the privately held company. The SEC, along with other regulators, accused the pair of presenting Celsius as a safe and traditional bank, despite increasingly risky operations promising returns of up to 17%.
Despite losing millions of dollars as customers withdrew funds, Mashinsky and Celsius claimed the company was financially secure and had adequate funds to meet withdrawals. Regulators also noted that Celsius engaged in "risky trading practices" and made uncollateralized loans, contrary to its statements to investors. Furthermore, the company misrepresented its success, falsely claiming a $50 million initial token sale and an active user base of 1 million when it had only around 500,000 depositors, many of whom were no longer active.
Following suit, the U.S. Commodity Futures Trading Commission and the Federal Trade Commission also sued Celsius and Mashinsky. The latter announced it had reached a settlement with Celsius, resulting in a permanent ban on the company handling customers’ assets.
To add to these complications, the Justice Department entered into a non-prosecution agreement with Celsius, wherein the company accepted responsibility for its role in the alleged schemes and pledged to continue cooperating with investigators.
This lawsuit further exacerbates the challenges for Celsius Network and its founder. Earlier this year, New York state’s attorney general sued Mashinsky on similar fraud allegations.
These legal actions highlight the precarious position of the crypto industry, especially as the SEC's recent lawsuits against crypto exchanges Binance and Coinbase Global potentially signal further regulatory challenges for the sector.
Given these developments, it is clear that cryptocurrency businesses, once seen as a way to democratize finance, must uphold the same principles of transparency and honesty expected of traditional financial institutions. The consequences for failing to do so, as seen with Celsius Network and its founder Alex Mashinsky, can be severe and damaging.
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