The 302-page Interim report on the Celsius Bankruptcy filings were dropped last night. The report addresses claims made by two groups that claim that the assets held in the Celsius ‘Custody’ and ‘Withhold’ accounts are property of the account holders, rather than Celsius bankruptcy estates.
The Celsius crypto asset-based finance platform was launched in 2018. The ‘earn’ program was the focus financial product. Customers transferred crypto assets to Celsius in exchange for ‘rewards.’ Customers could also borrow against deposited crypto assets used as collateral. The Celsius terms of service, which were changed a total of 8 times, stated that customers transferred “all right and title” of their crypto assets to Celsius. In 2021, the New Jersey Bureau of Securities ordered Celsius to cease and desist from offering the ‘Earn’ product to unaccredited investors.
Custody Accounts To The Rescue
Celsius responded by creating a ‘Custody’ account, in which customers were not eligible to earn ‘Rewards’ and title would remain with the customer. Celsius stated that it would “not transfer, sell, loan, or otherwise rehypothecate” Custody assets. The changes were largely secret until on April 11th, 2022, customers logging into Celsius received a notice that future deposits would be in a Custody account and previous deposits would remain on the ‘Earn’ program.
Seperate Wallets? Too Much Work
New wallets were never created, so ‘Custody’ account holder funds were commingled with ‘Earn’ account holder funds. In May 2022, Celsius faced liquidity challenges and by June 12th, 2022 they had stopped honoring withdrawal requests. The investigation revealed that Celsius did not properly reconcile accounts and shortfalls in Custody were funded with the main accounts. Once more, it appears that all assets went into the prospective blockchain’s aggregator wallet and were considered part of the Celsius treasury which was subject to liquidity reserves.
Shocking: Celsius Delays Documents Needed for the Investigation
The interim reporter noted that several documents needed for her investigation were delayed and not received until days before the filling of the Interim report. Celsius also claimed privilege over communications between Celsius and the regulators which further limited the ability of the investigator to receive all the facts. Still, the 302-page report offers intense insight into what went wrong.
Retain Relevance?
A former Celsius employee stated that the Custody program was created as a defensive play to “keep the assets with us, retain some sort of relevance.” Nuke Goldstein, former CTO of Celsius said that they were still evaluating how the Custody program could work and they lacked the engineers to roll it out properly. Mr. Layiwola, who ran the Custody Project development said they had the choice to either launch the product they had or stop accepting crypto assets in any form from non-accredited investors. It seems they choose to continue accepting deposits at all costs.
Blockchain Tech and Manual Reconciliations?
The time constraints from the deadline manifested in a product that was much different from the original concept. There were manual reconciliations that allocated for a ‘margin of error.’ In the end, the program was heavily manual and dependent on Celsius employees to track assets in the Custody wallets. In the blockchain world, this sounds extremely archaic. On top of manual reconciliations, Celsius determined that they could not actually create a ‘pure custody’ product in the time allotted. Still, they stuck with the “Custody” title based on their “future plans for the program.”
Surprise – We’re Taking Your Money
The Custody program came as a surprise to customers and that was intentional. First Celsius was hoping the deadline would change and second they didn’t want customers to just “move on.” Celsius even limited the number of employees who were aware of the ‘Custody’ account launch. Seems the goal was not security or value, but rather “the metric was customer retention.” The new terms of service that customers had to agree to stated that “by using the Custody Service, you understand and agree to appoint Celsius or a Third Party Custodian selected by Celsius to store and secure Eligible digital assets in a custody wallet.” The new terms of use also stated that title to eligible digital assets in the custody wallet “shall at all times remain with you and not transfer to Celsius.” And finally, the terms gave Celsius the right to suspend access to your access to the Custody wallet basically for any reason.
With a term of service that basically gave a royal middle finger to its clients, we can’t wait to see what’s next in the report. This summarized up to page 50 of the 302-page document, and we will continue our look into the Celsius Bankruptcy Filings with more tomorrow.
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