Alex Mashinsky founder of crypto lender Celsius, arrested on fraud charges

Credits: Forbes

Alex Mashinsky’s fate has been uncertain for months. In January, the founder and former CEO of the now-bankrupt crypto lending company, Celsius, was sued by the New York Attorney General on allegations of investor deception. Recently, Mashinsky was arrested and indicted by the US Department of Justice on seven fraud charges.

If proven guilty on all counts, he could potentially face a lengthy prison sentence of up to 115 years. Despite this, Mashinsky has entered a not-guilty plea and was granted release after posting a substantial $40 million bond.

Celsius’ downfall in June 2022 was part of a chain reaction within the crypto world, initiated by the collapse of the Terra Luna stablecoin in May 2022.

This series of events led to the crippling of the crypto industry, culminating in the November bankruptcy of FTX, a prominent crypto exchange. FTX’s founder, Sam Bankman-Fried, is currently facing 13 criminal charges.

The Department of Justice’s allegations against Mashinsky center around a purported scheme to defraud Celsius customers.

The accusations involve a series of false assertions about the security and reliability of the Celsius platform. Furthermore, Mashinsky is accused of collaborating with Celsius’ Chief Revenue Officer, Roni Cohen-Pavon, to artificially inflate the value of the company’s proprietary token, CEL.

“The message we send today is quite simple: If you rip off ordinary investors to line your own pockets, we will hold you accountable,” US Attorney for the Southern District of New York, Damian Williams, stated. “Whether it’s old-school fraud or some new-school crypto scheme, it doesn’t matter one bit. It’s all fraud to us.”

The SEC, CFTC, and FTC have all separately filed civil charges in a Manhattan federal court at the same time for similar reasons. Celsius has agreed to a $4.7 billion fine in a settlement with the FTC, which will be paid once creditors are reimbursed.

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The law firm representing Mashinsky did not respond to a comment request.

Mashinsky’s arrest brings relief to Celsius creditors, whose funds are stuck in bankruptcy proceedings. However, concerns linger in the industry about the same mindset that led to the rapid rise and fall of Celsius and FTX. Some worry that influential figures posing as innovators still pose a threat to the industry’s stability.

According to Travis Kling, co-founder of the hedge fund Ikigai Asset Management, “the crypto industry “has an enormous attack vector for intelligent sociopaths.”

He added, “We haven’t been honest with ourselves about how bad that attack vector is and how damaging it’s been.”

Established by Mashinsky in 2017, Celsius accepted individuals’ cryptocurrency deposits, utilizing these funds for investments or loans that funded interest payments to account holders while generating profits for itself. Attractive offers of interest rates as high as 17 percent on deposits, significantly surpassing traditional bank rates, enticed customers to join.

During its peak, the company safeguarded over $25 billion in customer assets, according to the DOJ’s allegations. In 2021’s crypto frenzy, Celsius’ “Ask Mashinsky Anything” live streams, where the founder addressed his “Celsian” followers weekly, drew large audiences.

However, the downfall of the Terra Luna stablecoin in May 2022 resulted in a billion-dollar deficit in Celsius’ balance sheet. Coupled with a crypto market decline, this rendered the company unable to handle a surge in customer withdrawals.

On June 12, the company paused withdrawals due to “extreme market conditions.” A month later, it filed for Chapter 11 bankruptcy, leaving $4.7 billion of customers’ funds trapped.

A similar sequence occurred among other crypto lenders like BlockFi, Voyager Digital, and Genesis Global Capital, which also declared bankruptcy due to links with Terra Luna’s failure, hedge fund Three Arrows Capital, and crypto exchange FTX.

“In the last 18 months, it has become very clear that centralized borrow-lend businesses are a huge problem. They ended up being the epicenter” of the collapse, says Kling, whose fund has substantial assets still locked in the FTX bankruptcy. There was so much reckless lending.”