https://twitter.com/0x_b1/status/1545153652624691200 - thread from Jason Stone on twitter
Behind the scenes, Celsius was investing customer funds in risky trading strategies, without proper controls, according to the lawsuit. Starting in August 2020, Celsius started transferring hundreds of millions of dollars to Stone’s company, KeyFi.
Though the two firms didn’t have a written agreement, Stone was given the private cryptographic keys to the funds, meaning he could have run off with them, according to the complaint.
Stone was tasked with investing the money through DeFi. Short for “decentralized finance,” it’s a constellation of apps that let users borrow, lend and trade with each other, without middlemen.
At the time, many of the apps were paying users huge rewards in proprietary cryptocurrencies. KeyFi earned more than $800 million for Celsius through DeFi strategies, according to the lawsuit. Stone says Celsius was supposed to pay him a 20% share of most of that but never did.
The problem, according to Stone, was that Celsius mainly took deposits in Bitcoin and Ethereum, but his strategies earned rewards in other coins. That meant that if Bitcoin and Ethereum went up faster than the others, Celsius could end up owing more than it had, even if it was earning money.
Celsius also kept track of customers’ deposits in U.S. dollar terms, even if they were actually owed Bitcoin or other tokens, according to the suit. When this error was discovered, it resulted in “a $100-$200 million hole on its balance sheet,” Stone alleged.
Celsius raised $50 million in 2018 by selling a proprietary token, CEL, and the company and its executives held large stocks of the cryptocurrency.
Stone now claims that Celsius in 2020 used $90 million worth of Bitcoin deposits to “artificially inflate” the price of CEL. He says that let Mashinsky “enrich himself,” and enabled Celsius to borrow against its CEL holdings. He also says that Celsius borrowed 1 billion Tethers from the stablecoin issuer to cover the hole in its balance sheet.
Stone says he ended his relationship with Celsius in March 2021 once he discovered the improprieties. In a thread on twitter, Stone wrote that Celsius “assured me they had risk management and hedging in place. But in late Feb 2021, we discovered Celsius had lied to us.”
Fascinating part of this is the background on the DeFi trading strategies and especially the claim by KeyFi that they aren't responsible for hedging out "impermanent loss". However, as we have noted before impermanent loss is anything but impermanent and is the key risk hole in liquidity strategies. Being able to trade and not be responsible for impermanent loss is like selling naked puts into a bull market and not being responsible for downside risk if the market sours. It's a heads I win, tails you lose strategy. Will be interested to see how this lawsuit goes.
This is someone points out in the twitter comments:
https://twitter.com/mgnr_io/status/1545287527422099456
From https://www.ledgerinsights.com/crypto-firm-voyager-digital-files-for-chapter-11/
Voyager Digital, the Toronto-listed crypto firm that lent bankrupt Three Arrows Capital $650 million, filed for Chapter 11 protection in New York bankruptcy court yesterday. At the end of the quarter to March 31, it said it had 1.2 million funded accounts.
Court filings show that its assets are between $1 billion and $10 billion, as are its liabilities. A balance sheet wasn’t filed, so the true deficit is currently unclear. (Update: a document shows its outstanding crypto loans amount to $1.1 billion.) Voyager requested to extend the deadline for sharing financial details. It had $5.8 billion in assets on the platform at the end of the first quarter.
The company says it currently has $1.3 billion in crypto-assets on its platform plus $110 million in crypto-assets and cash owned by the company. Additionally, $350 million of client cash is segregated in a client account and should be returned in full to customers, subject to compliance requirements.
Editorial:
- One interesting aspect of chapter 11 filing is that we are now getting more and more insight into the relatively opaque world of crypto finance.
- These crypto funds are using traditional state-based processes e.g. chapter 11
Coverage
- https://www.ledgerinsights.com/crypto-firm-voyager-digital-files-for-chapter-11/
- https://www.theguardian.com/technology/2022/jul/06/cryptocurrency-broker-voyager-digital-files-for-bankruptcy-protection
2022-07-02 - Fall-out from Three Arrows Capital as BlockFi sells and Voyager faces bankruptcy
Crypto-lender [[notes/blockfi|BlockFi]] are a creditor of collapsed crypto hedge fund Three Arrows Capital. After taking $350m at a $3bn valuation in March 2021 it looks like they may be worth only 1-10% on the dollar with an option to be acquired for up to $240m by FTX
https://decrypt.co/104286/blockfi-ftx-credit-deal-acquisition-terms
https://decrypt.co/104200/blockfi-ceo-denies-ftx-cquire-crypto-lender-25m
Meanwhile Voyager Digital who are owed $650m by Three Arrows Capital has halted all withdrawals and is likely going bankrupt.
https://decrypt.co/104294/voyager-digital-halts-withdrawals-three-arrows-capital-default
May 17: Famous investor Bill Ackman weighs in on Terra/Luna collapse:
https://twitter.com/BillAckman/status/1526398201003130880
When I read about the ‘algorithm’ of @terra_money it sounds just like a crypto version of a pyramid scheme. Investors were promised 20% returns backed by a token whose value is driven only by demand from new investors in the token. There is no fundamental underlying business.
Though it seems he is in danger of the classic fallacy of "yes there's some bad, but there must be some good":
The digitization of the Luna scheme and the hype about crypto enabled it to achieve enormous scale quickly. Blockchain is a brilliant technology with enormous potential. Schemes like Luna threaten the entire crypto ecosystem. The crypto industry should self-regulate away other crypto projects with no underlying business models before crippling regulation shuts down the good and the bad. Hyping tokens that are not supported by businesses that create value will destroy the entire crypto industry. Why and/or where am I wrong?
Should be asking what is the "fundamental underlying business" for most other crypto-assets.`
https://twitter.com/JohnReedStark/status/1528052514758836224
ECB President Christine Lagarde: "Crypto-currencies are worth nothing and based on nothing,” and should be regulated to steer people away from speculating on them. Finally, a leader courageous enough to call crypto what it is - a huge, global Ponzi scheme.