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NY Attorney General Sues Collapsed Crypto Bank Founder

NY Attorney General Sues Collapsed Crypto Bank Founder

NY Attorney General Sues Collapsed Crypto Bank Founder

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New York Attorney General Letitia James sued the founder of collapsed cryptocurrency bank Celsius Network on Thursday, accusing him of defrauding hundreds of thousands of investors.

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The lawsuit stems from Celsius’ implosion this summer, when the company filed for bankruptcy and its customers lost billions of dollars in deposits. For years, Celsius founder Alex Mashinsky, 57, misled customers into depositing their crypto savings on the platform, promising it was as safe as a traditional bank, according to the lawsuit. The lawsuit seeks to bar him from doing business in New York and force him to pay damages.

“When Celsius suffered losses on risky investments, Mashinsky did not disclose those losses to investors,” the lawsuit said. “The Celsius collapse has left many people in a state of despair and financial ruin.”

A Celsius spokesperson said in a statement that Mr. Mashinsky was no longer involved in running the business. Mr. Mashinsky did not respond to a request for comment.

The lawsuit is the government’s latest aggressive response to the risky practices and widespread fraud that plunged the crypto industry into crisis in 2022. Last month, US prosecutors charged Sam Bankman-Fried, the founder of the collapsed crypto exchange FTX, widespread fraud. Mr. Bankman-Fried also faces civil lawsuits from the Securities and Exchange Commission and the Commodity Futures Trading Commission.

On Wednesday, the SEC also pushed back on plans by the U.S. arm of crypto exchange giant Binance to buy Voyager Digital, a Celsius-like crypto lending operation that failed around the same time.

Before FTX declared bankruptcy in November, the failure of Celsius was considered arguably the worst moment of the crypto disaster of 2022. For years, Mr. Mashinsky had promoted the company with a marketing promise too good to be true: an interest of up to 17%. on crypto deposits.

As the industry exploded, he became one of its most successful and charismatic pitchers. He frequently appeared in YouTube videos promoting Celsius as a populist and egalitarian alternative to the traditional banking system, which he said defrauded customers. By June, he had recorded 179 “ask me anything” videos, most of which were around an hour long, depending on the suit.

Mr. Mashinsky’s pitch worked. In 2021, Celsius, which was based in New Jersey, managed assets valued at $20 billion.

But cracks appeared when the crypto industry began to falter in May. As Celsius grew, according to the lawsuit, the company struggled to generate enough revenue to pay high returns.

“Seeking revenue, Celsius embarked on much riskier investments, granting hundreds of millions of dollars in unsecured loans and investing hundreds of millions of dollars in unregulated decentralized finance platforms,” the lawsuit states. .

Some of Celsius’ risky loans went to Alameda Research, the crypto hedge fund Mr. Bankman-Fried founded. Between 2020 and 2022, according to the lawsuit, Celsius loaned Alameda about $1 billion. As collateral for the loans, Celsius accepted a crypto token Mr. Bankman-Fried had invented called FTT. The price of FTT fell this fall, contributing to the fall of Alameda and FTX.

By then, Celsius was already in deep trouble. The company collapsed in June and filed for bankruptcy the following month. After a brief attempt to revive the company, Mr. Mashinsky resigned in September. Now clients are scrambling to recover what’s left of their savings, hiring lawyers to represent them in the bankruptcy process.

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