Alan Nietowski holds an MBA, has worked in technology and finance for over 25 years, and is the CEO of a Nasdaq-traded mobile software company. That didn’t stop him from being scammed by a crypto firm.
Nietovsky 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 rise.
Related investment news
It was the Celsius model. Cryptocurrency investors can essentially store their holdings with a firm in exchange for a loan in dollars that they can use. Nitovsky will get bitcoins back when he repays the loan.
But that hasn’t happened, as Celsius, which had $12 billion in assets under management at the start of the year, filed for bankruptcy in July after the fall in crypto prices created an industry-wide liquidity crisis. Nietovsky and thousands of other loan holders locked up more than $812 million in collateral on the platform, and bankruptcy records show Celsius failed to return the collateral to borrowers even after they paid off their loans.
“Every aspect of what they did was wrong,” said Nitowski, who runs the Austin, Texas-based company. Funware, said in an interview. “If my CFO or I actually did anything like this, we would be charged immediately.”
Creditors are now working through the bankruptcy process to try and reclaim at least a portion of their funds. Celsius was given some level of optimism on Friday after it announced the sale of its asset custody platform, called GK8, to Galaxy Digital.
David Adler, a bankruptcy attorney at McCarter & English representing the Celsius creditors, said the money from the transaction will go toward paying legal fees. In addition, there may be outstanding funds for former customers.
“The big question is – who is entitled to the money that comes from GK8?” Adler told CNBC. Adler said he represents a group of 75 borrowers who have about $100 million in digital assets on Celsius’ platform.
Later this month, more relief may come as bidding opens for Celsius’ lending portfolio. If another company buys the loans, customers are likely to pay them off and then release their collateral.
Nitowski told CNBC that he chose to take out his loan at a 25% loan-to-value rate. That means if he took out a $25,000 loan, he would post four times that amount in collateral, or $100,000.
The more collateral the 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 cover costs. It is similar to 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 bitcoins as collateral.
Earlier this year, as the price of bitcoin plummeted, Nietovsky paid off one of his Celsius loans to avoid a margin call and having to raise his collateral. But after doing so, the company did not return the bitcoins that served 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 paid off your car, but someone keeps it,” Nietowski said. “You pay off your house, but someone keeps it. In this case, it would be like you pay off the loan. And instead, you don’t get your collateral back even though it’s paid off.”
Failure to disclose
That wasn’t the only problem. The crypto platform also failed to provide full federal Truth in Lending Act (TILA) disclosures to borrowers, according to former employees and an email sent to 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), the term of the loan and the total cost to the borrower.
The email told borrowers, “The disclosures you are required to provide 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 potential missing disclosures.
A former Celsius employee, who asked to remain anonymous, told CNBC that the company is trying to comply with TILA retroactively.
“You can’t say, ‘Oh, hey, we forgot like 25 items in the Truth in Lending Act and as a result, we’re going to redo it and pray,'” Nitowski said.
Jefferson Nunn, an editor and contributor to Crypto.news, took out a loan with Celsius and posted more than $8,000 worth of bitcoins as collateral. He knows that those assets are now unavailable to him, even if he pays off his loan.
Nunn, who lives in Dallas, said he got the loan to invest in more bitcoin after seeing promotions for the platform. 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 the withdrawal was halted.
Alex Mashinsky, Celsius CEO, on stage in Lisbon for Web Summit 2021
Piaras Ó Mídheach | Sportsfile | Getty Images
“It’s basically a mess and my funds are still locked up there,” Nunn said.
That theme has come up again and again in crypto, most recently with the failure of FTX last month. Sam Bankman-Fried, founder and CEO of the exchange, told his followers on Twitter that the company’s fortunes are good. A day later, it was looking for a rescue package amid a liquidity crunch.
While Celsius’s implosion hasn’t had the magnitude of FTX, which was recently valued at $32 billion, company management has faced its share of criticism. According to court filings in October, top executives siphoned off tens of millions of dollars in assets before the company halted withdrawals of customer funds.
A former employee, who spoke on condition of anonymity, said there was a lack of financial oversight that left significant holes in the company’s balance sheet. The biggest problem was that Celsius had a synthetic short, which occurs when a company’s assets and liabilities don’t match.
A former employee told CNBC that when customers deposited crypto assets with Celsius, it was supposed to ensure that the funds were available when the customer wanted to withdraw them. However, Celsius was taking customer deposits and lending on a risky platform, so it did not have the liquidity to return 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 lapse in judgment and operational control that really dented the balance sheet of the organization,” said a former employee.
He also said that Celsius is collecting cryptocurrency tokens that have no value as collateral. On its platform, Celsius said customers can “earn compounding crypto rewards on BTC, ETH and 40+ other cryptocurrencies.” But according to a former employee, the teams responsible for deploying those coins had nowhere to go with the much more obscure tokens.
A former employee said he left Celsius after discovering the company was not being prudent with customer funds and was making risky bets to continue producing the high yields it had promised depositors.
“Many individuals took all their money out of the traditional banking system and put their full trust in Alex Mashinsky,” the person said. “And now those individuals are left unable to pay medical bills, pay for weddings, mortgages, retirement, and that puts a very heavy burden 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.