In September last year, Alex Mashinsky was riding high.
Appearing on a panel sponsored by Johns Hopkins University to talk about bitcoin and other cryptocurrencies, Mashinsky, the chief executive of the crypto banking firm Celsius, exuded confidence about the future of crypto and disdain for traditional banks and traditional currencies.
"The banks have abused their power," Mashinsky said, citing the discrepancy between the interest that banks pay on dollar deposits — an annualized rate of less than 1% — and the nearly 9% that Celsius paid on deposits of some digital currencies. "Is the real value of money 0.1%?" he asked. "Or is the real value of money ... 8.8%?"
To hundreds of Celsius' 1.7 million customers, the value of the $11.7 billion in assets they deposited with the firm might as well be zero.
"Mashinsky always talked very confidently about how strong Celsius was and how much better than banks," recalls Harold M. Lott, 35, a Nashville-area nurse who had as much as $14,000 in cryptocurrency assets deposited at Celsius at the peak of the crypto market.
"He never gave any indication that there was a problem," Lott says. "But suddenly, out of the blue, they just stopped all transfers."
That was on June 12, when the company froze all customer withdrawals and other transactions. On July 13, Celsius filed for bankruptcy protection, revealing that it owed customers $4.7 billion but had only $170 million in cash on hand. All told, the company declared a $1.2-billion discrepancy between its assets and liabilities.
Lott is among hundreds of small investors who have written to Bankruptcy Court Judge Martin Glenn, who is overseeing the case, to ask that their funds be sprung from legal purgatory.
They're retirees, small-business owners, ordinary workers. They've been saving for retirement or to buy a home or to send their children to college — funds that they fear will be gone forever. They write of being ashamed, depressed and suicidal.
Generally speaking, the letters open a window on hazards of investing in the volatile cryptocurrency markets, or with firms that lack a long track record of serving customers and operate without the government safeguards afforded to traditional bank depositors and stock and bond investors.
Well-heeled investors can play in the markets for unregistered securities and stake their money with hedge funds, private equity firms and private placements, but the law requires that they be "qualified" or "accredited" — generally that they can show investment promoters a net worth of at least $1 million or annual income of at least $200,000.
Crypto hasn't been treated as an investment warranting such oversight. On the contrary, it's been pitched to small investors. Fidelity Investments is even offering employers a way to allow workers to invest their 401(k) retirement funds in cryptocurrencies.
The investment class has been promoted through mass media, including through Super Bowl commercials featuring Matt Damon and Larry David.
Their theme is that the average man and woman finally has a way to get launched on an asset destined to dominate the financial world of the future and a chance to get back at the banks and brokerages that have shortchanged them for years.
The targeted customers, however, might lack the resources to sustain them in a downturn or to rebuild their wealth after a loss. They're investment outsiders, likely to be near the tail end of the repayment line in the Celsius bankruptcy, if there's anything left to cover a repayment at all.
The insiders may make out much better. Celsius' bankruptcy filing says its payroll for top executives, including Mashinsky, comes to $730,833 a week, or more than $38 million on an annual basis. There are no indications that the company plans to pare that back unless the judge so orders.
A Rancho Cucamonga man told the judge that the possible loss of his family's nest egg has driven him to drink and to the point that his wife of 17 years "asked me to leave our home due to my emotional turmoil and unpredictability.... I don't know how to express the guilt, the frustration, the shame, the self-doubt, and absolute anger that I am feeling regarding the burden I have caused and placed on my family."
The letters have come from all across the U.S. and from overseas. Many are anonymous. Some ask that Glenn order their accounts to be released, others express resignation that as unsecured creditors of a firm that has only enough assets in hand to cover a small fraction of what they're owed, their money is gone.
According to the bankruptcy filing, the largest sum owed to any single customer is $40.6 million (the customer is unidentified), but the letter writers seem generally to be owed sums in the four, five or six figures.
One who identified himself only as "Andrew" told Glenn that he had deposited $125,000, "a substantial portion of my life's savings."
Like other depositors, he queried Celsius this spring about rumors that the company was in financial trouble because of a crash in the crypto markets, only to receive assurances from Mashinsky that all was well: "We understand that these are turbulent times, but it also reminds us of the foundation we've built Celsius on and the belief of unlocking financial freedom with crypto for the long haul."
Andrew wrote, "I wish I had the financial freedom that was suggested in this statement right now — instead, like tens of thousands of users, we are unable to access our funds that we believed to be ours to withdraw or transfer anytime. This is the exact opposite of financial freedom — more like financial jail, or worse for many … financial death."
Many of the depositors focus their anger not on the crypto markets but on Mashinsky. "He's a very good speaker," Brandon Lawrence, a Los Angeles information technology worker, told me.
Lawrence deposited two bitcoins with Celsius worth about $52,000 at the time — investments he had bought by taking out a margin loan from the brokerage firm Robinhood Markets.
He figured that the interest yield he would earn from Celsius would more than cover the interest payable on the margin loan, but now he still owes the margin interest but is getting nothing from Celsius.
"I am one of the little guys," Lawrence, 35, wrote to the judge. "It was my nest egg," he wrote. "Now when I go to work, I drink water and eat any scraps I can find for lunch.... I am in deep depression and do not know if I can pull myself out of this."
Many Celsius customers were enticed by lavish interest rates offered by a program in which they would allow Celsius to lend their crypto deposits to others.
The purported yield to customers from these transactions ran to more than 18% on some cryptocurrencies — an obvious bounty compared with the tenths of a percent interest that conventional banks paid on cash deposits.
A former money manager for Celsius has charged in court that the arrangement was essentially a Ponzi scheme, in which money for the high interest payouts came from assets deposited by later customers.
The problems began as early as January 2021, according to the manager, Jason Stone. At that time, the value of the digital currency ethereum soared, increasing Celsius' obligations to customers who had deposited ethereum. But Celsius didn't have enough ethereum to cover its obligations.
"Faced with a liquidity crisis, Celsius began to offer double-digit interest rates in order to lure new depositors, whose funds were used to repay earlier depositors and creditors," Stone's lawsuit states. "Thus, while Celsius continued to market itself as a transparent and well-capitalized business, in reality, it had become a Ponzi scheme."
In a bankruptcy filing, Mashinsky said Celsius "strongly disagrees with the allegations" raised by Stone and intends to defend against them "vigorously."
Mashinsky was a ubiquitous promoter of the purported virtues of digital currency, appearing frequently on social media.
At the Johns Hopkins panel, sponsored by the university's Alexander Grass Humanities Institute, he contrasted the ability of central banks to manage their economies by printing more of their own nations' currencies with the hard limit on how many bitcoins can ever be issued, based on the digital algorithm it's based on.
(The other members of the panel were Lee Reiners of Duke Law School, economist Amy Crews Cutts and myself — all crypto skeptics.)
"Because you're printing unlimited amounts of dollars," Mashinsky said, "more and more people are choosing to get away from that dollar denomination." As the dollar declines in value, he argued, "you have an increase in value in an asset that has a limited supply."
This was a textbook crypto spiel, yoking warnings about the inevitable crash of government-backed currencies to assurances of an equally inevitable rise in the value of digital currencies.
Mashinsky offered more to customers — affirmation that his firm was so well-capitalized that their money was safer with Celsius than with traditional banks. His mantra, printed on a T-shirt he wore at a conference, was "Banks are not your friends."
At the event, his assurances roped in believers and nonbelievers in cryptocurrencies alike. "I was just using their platform as a checking account because they were paying better interest than a bank would," says one customer, a below-the-line Hollywood worker (one of the legion of technicians and others without whom no movie or TV show would make it to the screen) who wrote to Judge Glenn and asked to remain anonymous.
This customer kept mainly U.S. dollars in his account, collecting 7% to 9% in an effort to keep up with inflation. "Mashinsky would go on the internet weekly and say, 'Your money is safer here than in a bank.' He made everybody believe it was a safe place. But they were lying and they lost everybody's money. I wasn't even investing there, just letting my money sit there."
He's now out $40,000 in U.S. dollars and $10,000 in crypto, leaving him strapped to pay this month's rent. "I'm honestly not a big believer in crypto," he told me.
Lawrence has the opposite take. "I still feel bullish on bitcoin," he told me. "I don't like the idea of how the U.S. creates money by printing. I like the fact that bitcoin has accountability." He sees bitcoin as a counterweight to "the establishment that does so many people wrong. The real problem is greed and mismanagement of Celsius. Crypto is not to blame. I may be down most of my money right now, but it's a bump in the road."
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