Alex Mashinsky was never as popular as Sam Bankman-Fried or as brash as Do Kwon, but on Thursday he joined them in what is becoming a very fast-growing club: onetime crypto kingpins who have been arrested and charged with billions of dollars’ worth of fraud.
Mashinsky is the co-founder and CEO of Celsius Networks, a lending platform that, according to the company’s own marketing materials, worked just like a bank. In fact, its model would be familiar to anyone who had a Chase account: Deposit some crypto there, and in return, the depositor would get a high-yield payment so that Celsius would lend it out to other investors. Mashinsky’s company would offer yields as high as 17 percent. (By way of comparison, a Chase account for cash would give you practically nothing back.. This promise — of huge returns for no risk — was one of the driving forces behind Celsius’s popularity, which had about $25 billion in assets at its peak, according to the Justice Department.
But such a good deal was too good to be true. Exactly a year ago, Celsius filed for bankruptcy. It turns out it didn’t have the money to pay such high yields to its customers, and money it lent out was caught up in the other collapses that had leveled the markets — TerraUSD and Luna, the related digital currencies created by Kwon, and Three Arrows Capital, the hedge fund that was propping those currencies up. Celsius now owes creditors $4.7 billion.
“Bros sis fuck yeah Mashinsky was arrested!!!!!” one of those creditors — he goes by Pablo and has an avatar of the Toxic Avenger — wrote in a Telegram group Thursday morning after the news broke.
The Justice Department charged Mashinsky with seven counts of fraud, market manipulation, and conspiracy, according to the indictment. On top of that, the Securities and Exchange Commission, Commodities Futures Trading Commission, and the Federal Trade Commission all charged Mashinsky and Celsius with civil fraud charges. (Celsius settled with regulators for about $5 billion, which will get paid after creditors receive their money.) Celsius’s other co-founder and chief financial officer, Roni Cohen-Pavon, was also arrested and charged with criminal fraud. The new charges add to Mashinsky’s already existing problems, since he’s facing civil fraud charges filed by New York attorney general Letitia James in January.
According to the indictment, Mashinsky orchestrated a handful of frauds while leading Celsius: He lied about the success of its fundraising using digital tokens, he lied about the profitability of its loans, and he lied about the safety of its holdings. Perhaps the biggest alleged fraud was around Celsius’s own digital currency, CEL. In order to fund its operations, it needed to sell its own tokens, which basically functioned like stock. Prior to its collapse, outsiders would have seen that there was a high demand for CEL, but almost all the buying was secretly being done by Celsius itself — a move that allegedly inflated the price up. This also directly benefited Mashinsky — who allegedly sold hundreds of thousands of the CEL tokens, even as he publicly said he was buying more of them, according to the indictment.
Amazingly, Mashinsky and Cohen-Pavon documented their alleged market-manipulation plans on WhatsApp. In January 2022, Mashinsky asked his CFO whether they needed to keep the value of the CEL token above $5. That day, the token dropped about ten cents to around $4.22, and Cohen-Pavon remarked that just keeping it from falling more was “not simple.” A few months earlier, the two of them outright discussed how the value of the token was illusory. “The issue is that people are selling and no one is buying except for us,” Cohen-Pavon wrote in an October message, according to the indictment. “The main problem was that the value was fake and was based on us spending millions (~8M a week and even more until February 2020) just to keep it where it is.”
This was apparently well known in the company. According to the SEC: “One employee called Celsius a ‘sinking ship,’ while another wrote that ‘there is no hope … there is no plan’ and that Celsius’s business model ‘is fundamentally broken.’ On May 21, 2022, a Celsius executive candidly acknowledged in an internal message: ‘We don’t have any profitable services.’”
Mashinsky, who is an Israel-born serial entrepreneur, had started Celsius in 2017 as a way to challenge Wall Street banks, which he derided as slow, boring, “TradFi” dinosaurs in an age of financial innovation. Just days before Celsius collapsed, he was scolding people on Twitter for saying that Celsius customers were having trouble withdrawing. Even after Celsius filed for bankruptcy — exposing a $1 billion hole in its balance sheet — he defended himself as the victim of a nefarious whisper campaign from those who were out to get him. “No financial Institution anywhere in the world is safe from the Financial Terrorists trolling Twitter and YouTube trying to bring down any fintech or Tradfi player for a quick profit,” he wrote in a private March 12 tweet, which appears to compare the collapse of Celsius to Silicon Valley Bank. “None of these bad actors have been held accountable since late 2021. It’s time to change the laws to limit free speech on [social media] to not include causing intended financial harm with false claims.”
