Alan Nitowski Holds an MBA, has worked in technology and finance for over 25 years and is the CEO of a mobile software company that trades on the Nasdaq. This didn’t stop him from being defrauded by a crypto firm.
Nitovsky borrowed $375,000 from crypto lender Celsius over several years and posted $1.5 million Bitcoin as collateral. He didn’t want to sell his bitcoin because he liked it as an investment and believed the price would go up.
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That was the Celsius model. Cryptocurrency investors essentially store their holdings with the firm in exchange for loans in dollars that they can access. Nitovsky will get the bitcoin back when the loan is repaid.
But that didn’t happen, because Celsius, which had $12 billion in assets under management earlier this year, pushed into bankruptcy The plunge in crypto prices in July triggered a liquidity crisis across the industry. Nitovsky and thousands of other loan holders had more than $812 million in collateral locked up on the platform, and bankruptcy records show Celsius failed to return the collateral to borrowers even after the loans were repaid.
“Every aspect of what they did was wrong,” said Nitowski, who runs a company based in Austin, Texas. Funware, said in an interview. “If my CFO or I had actually done something that looked like this, we would have been charged immediately.”
Creditors are now working through the bankruptcy process and attempting to recover at least a portion of their money. There was some optimism on Friday when Celsius announced the sale of its asset custody platform GK8 to Galaxy Digital.
David Adler, a bankruptcy attorney with McCarter & English, who is representing Celsius creditors, said the money from the transaction is to go to pay legal fees. In addition, there may be balances for former customers.
“The big question is – who is entitled to the money from GK8?” Adler told CNBC. Adler said he is representing a group of 75 borrowers who have approximately $100 million in digital assets held on the Celsius platform.
Later this month, more relief may come as bidding for Celsius’ lending portfolio will open. If another company buys the loans, customers will have a chance to repay them and then their collateral will be released.
Nitowski told CNBC that he had elected to take out his loan at a 25% loan-to-value rate. This means that if he took a loan of $25,000, he would post four times that amount in collateral, or $100,000.
The more collateral a borrower is willing to post, the lower the interest rate on the loan. If the borrower fails to repay the loan, the lender can seize the collateral and sell it to recover costs. It is like a residential mortgage, for which the borrower uses the home as collateral. In the crypto world, a borrower can ask for a loan and pledge bitcoin as collateral.
Earlier this year, as the price of bitcoin plummeted, Nitovsky paid off one of his Celsius loans in order to avoid margin calls and increase his collateral. But after doing so, the company did not return the bitcoins that were serving as collateral for that loan. Instead, the assets were deposited into an account called “Earn”. According to the company’s terms and conditions, the assets in those accounts are the property of Celsius, not the customers.
“Imagine you pay off your car, but someone keeps it,” Nitowski said. “You pay off your house, but someone puts it up. In this case, it’s like you pay off a loan. And instead, you don’t get your collateral back, even though it has been paid off. “
failed to disclose
This was not the only problem. The crypto platform also failed to provide full federal Disclosure to Borrowers Truth in Lending Act (TILA), according to an email sent to former employees and customers on July 4. The Act is a consumer protection measure that requires lenders to provide important information to borrowers. , such as the annual percentage rate (APR), loan term, and total cost to the borrower.
The email to borrowers said, “The disclosures that must be provided to you under the federal Truth in Lending Act did not include one or more of the following,” and then went on to list more than a dozen potentially missing disclosures.
A former Celsius employee, who asked to remain anonymous, told CNBC that the company was trying to retroactively come into compliance with Tila.
“You don’t have to say, ‘Oh, oops, we forgot 25 items in the Truth in Lending Act and as a result, we’re just going to do them again and pray,'” Nitowski said.
jefferson nun, an editor and contributor to Crypto.news, took out a loan with Celsius and posted over $8,000 worth of bitcoin as collateral. He knows that those assets are unavailable to him now, even if he pays off his loan.
Nunn, who lives in Dallas, said he got a loan to invest in more bitcoin after seeing the platform’s hype. He said he heard about Celsius after doing a podcast with co-founder Nuke Goldstein. On the show, Goldstein said, “Your funds are safe,” Nunn said. Alex Mashinsky, the former CEO of Celsius, made similar comments shortly before withdrawals were halted.
Alex Mashinsky, Celsius CEO on stage in Lisbon for Web Summit 2021
Piers o Midhatch | Sportsfile | Getty Images
“It’s basically a mess and my funds are still locked up there,” Noon said.
That topic has come up time and time again in crypto, most recently failure of ftx last month, Sam Bankman-Fried, the exchange’s founder and CEO, told his followers on Twitter that the company’s assets are in good shape. A day later, he was seeking a rescue package amid liquidity crunch.
While Celsius’ implosion does not bear the magnitude of FTX, which was recently valued at $32 billion, the company’s management has faced its own criticism. According to a court filing in October, top officials took out property worth crores Before the Company stops the withdrawal of Customer funds.
A former employee, speaking on condition of anonymity, said the lack of financial oversight left significant holes in the company’s balance sheet. One of the biggest problems was that Celsius had a synthetic short, which occurs when a company’s assets and liabilities don’t match.
The former employee told CNBC that when customers deposit crypto assets with Celsius, it should have ensured that those funds were available whenever a customer wanted to withdraw them. However, Celsius was taking customer deposits and then lending on a risky platform, so it did not have the liquidity to return the funds on demand.
As a result, when clients wanted to withdraw funds, Celsius would scramble to buy assets on the open market, often at a premium, the person said.
“It was a colossal error in judgment and operational control that really dented the balance sheet of the organization,” the former employee said.
He also said that Celsius was depositing cryptocurrency tokens that had no value as collateral. On its platform, Celsius states that customers can “earn compounding crypto rewards on BTC, ETH, and 40+ other cryptocurrencies.” But according to the former employee, the teams responsible for deploying those coins had nowhere to go with many of the more obscure tokens.
The former employee said he left Celsius after it became known that the company was not prudent with customers’ money and was making risky bets in order to keep promising high yields to depositors.
“A lot of people took all their money out of the traditional banking system and put all their faith in Alex Mashinsky,” the person said. “And now those individuals have been left unable to pay medical bills, pay for weddings, mortgages, retirement, and it’s taking a toll on me and my colleagues who have left the organization.”
Celsius did not respond to multiple requests for comment. Mashinsky, who resigned From Celsius in September, declined to comment.