FTC Reaches Settlement with Crypto Platform Celsius Network; Charges Former Executives with Duping Consumers into Transferring Cryptocurrency into their Platform and then Squandering Billions in User Deposits

The Federal Trade Commission announced a settlement with the bankrupt cryptocurrency platform Celsius Network, charging three former executives with tricking consumers into transferring cryptocurrency onto the platform by falsely promising that their deposits would always be available and safe, and permanently banning them from handling consumers’ assets.

“Samuel Levine, Director of the FTC’s Bureau of Consumer Protection, stated that the recent measure prohibiting Celsius from managing individuals’ finances and ensuring its leaders are held responsible should emphasize that innovative technologies are subject to legal regulations. Levine further added that although Celsius promoted a novel approach to business, it ultimately participated in a traditional scam.”

The FTC’s lawsuit against the ex-CEO and co-founder Alexander Mashinsky, as well as the other co-founders Shlomi Daniel Leon and Hanoch “Nuke” Goldstein, will continue in federal court. Additionally, the corporations have agreed to a $4.7 billion judgment, which will be temporarily halted to enable Celsius to return its remaining assets to consumers through bankruptcy proceedings. The suggested resolution with Celsius and its associated companies will effectively prohibit them from providing, advertising, or endorsing any product or service that facilitates the deposit, exchange, investment, or withdrawal of assets.

“We possess significantly reduced risk” as “our risk has been decreased, resulting in a substantial reduction in risk.” Banks claimed that their platform was safer than others in forums, online videos, and marketed the platform as a secure place for consumers to deposit their cryptocurrency. Goldstein and Leon, along with Mashinsky, filed a complaint against the platform in federal court by the FTC. Celsius-based, a cryptocurrency exchange, marketed a variety of cryptocurrency services and products to consumers, including secured loans against their cryptocurrency deposits and interest-bearing accounts. They filed for bankruptcy in July 2022 in New Jersey.

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The company repeatedly claimed that they could earn rewards on deposits of cryptocurrency assets in their Earn program, with an annual percentage yield (APY) as high as 18 percent. They also stated that they had sufficient reserves to meet customer obligations and that they maintained a $750 million insurance policy. However, the FTC says that top executives at the company deceived users by falsely promising that they could withdraw their deposits at any time.

Consumers were required to provide access to sensitive information, including their financial information and other bank account details, when opening accounts with Celsius. Many consumers reported that these promises were important factors in their decision to deposit cryptocurrency with Celsius.

As per the allegation, Celsius unlawfully acquired these deposits amounting to over $4 billion and acquired ownership of customers’ cryptocurrency deposits, rather than safeguarding them. The firm utilized consumer deposits to finance its operations, compensate other customers, borrow from other establishments, and engage in high-risk investments, even though the company admitted that such investments frequently resulted in financial losses.

The complaint alleges that Celsius, the company in question, lacked a system to track its liabilities and assets until mid-2021. Additionally, Celsius did not hold $750 million in insurance policy deposits. The complaint further states that Celsius only had a small capital reserve, which allowed them to permit their customers to withdraw a fraction of their cryptocurrency within one week. The FTC claims that Celsius routinely made unsecured loans totaling $1.2 billion as of April 2022.

The company provided the highest returns only to those consumers who invested in a handful of lesser-known cryptocurrencies and enrolled in its loyalty program. However, Celsius, the company, also failed to deliver the promised returns on their cryptocurrency, as stated by the FTC and top executives.

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The FTC reported that Celsius falsely promised consumers that it had more assets than it actually did, freezing consumer withdrawals just a few days before declaring bankruptcy. In an online video in May, Mashinsky falsely claimed that Celsius had “billions of dollars in liquidity” and was stronger than ever. The company also froze customer accounts just days before soliciting new customers, concealing this information from the public and even top executives. Additionally, the company’s fiscal health declined, further compromising the safety of customer deposits.

Prior to the company’s bankruptcy filing, Leon, Goldstein, and Mashinsky safeguarded themselves by withdrawing substantial amounts of digital currency from Celsius two months prior, all the while deceiving their customers to prevent them from withdrawing their cryptocurrency deposits. Consequently, consumers lost access to their life savings, college funds, and retirement savings.

The proposed settlement prohibits companies from misrepresenting any product or service and from making fraudulent, fictitious, or false representations to any customer of a financial institution in order to obtain or attempt to obtain their financial information. It also prohibits them from disclosing consumers’ nonpublic personal information without their express consent.

The complaint was filed in the Southern District of New York for the U.S. District Court. The affiliated companies and Celsius filed a complaint, and the staff authorized by the Commission voted 3-0 to approve a stipulated order against the enterprise of Leon Mashinsky and Goldstein, Celsius.

The judge in the District Court grants and signs agreed upon orders, which carry the weight of legislation. The Commission determines that a case is in the best interest of the public when it has “grounds to suspect” that the specified defendant is infringing or is on the verge of infringing the law, thereby enabling the submission of a complaint.

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The lead staff attorneys on this matter are Katherine Aizpuru, Katherine Worthman, and Stephanie Liebner from the FTC’s Bureau of Consumer Protection.

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