Speaker 1: This is Bloomberg Crypto, a daily Bloomberg Ihad podcast, and
Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News.
Speaker 1: It's Tuesday, February twenty eight. Before it filed for bankruptcy
Speaker 1: last summer, crypto lenders Celsius had a devoted following among
Speaker 1: retail investors. These investors believed in the repeated affirmations from
Speaker 1: Celsius's charismatic CEO, Alex Mushinsky. Mushinski would say that these
Speaker 1: investors were making smart, low risk financial decisions by trusting
Speaker 1: their digital tokens to the company, But the reality of
Speaker 1: what was happening behind the scenes, according to a recent
Speaker 1: report from an independence examiner, sounds like it was very different.
Speaker 1: According to the allegations and report, the risk controls at
Speaker 1: Celsius were much less thorough and much less sophisticated than
Speaker 1: what they were telling their customers at the time. That
Speaker 1: report clocks in at six hundred and eighty nine pages,
Speaker 1: so there's a lot in there, But fundamentally, it alleges
Speaker 1: that Celsius misrepresented the true financial health of the company
Speaker 1: in ways that turned out to have devastating consequences for
Speaker 1: those customers who trusted them. Bloomberg's Olga Kreife has read
Speaker 1: many hundreds of those pages, and she joins me now
Speaker 1: with the details. Olga, welcome back to the show. Thank
Speaker 1: you for having me today. We are not going to
Speaker 1: talk about that's a big change, that's huge. I know
Speaker 1: it's a surprise, But we are going to talk about
Speaker 1: a company that I think, in a lot of ways
Speaker 1: is equally important to understanding what's been happening in crypto,
Speaker 1: and that company is Celsius. I and again reminding all
Speaker 1: others nerves, this is a theoretical example. I do not
Speaker 1: personally own a bunch of crypto. I do not own
Speaker 1: any crypto. But if I did own a bunch of crypto,
Speaker 1: I could have gone to Celsius, would say ten thousand
Speaker 1: dollars worth of bitcoin, for example, and then said, okay, Celsius,
Speaker 1: I'm gonna let you take this money and lend it
Speaker 1: out to other people, and you will pay me some
Speaker 1: kind of really high interest rate in return. Is that correct?
Speaker 1: That's exactly right. And you know, for years Alexandmaschinsky, CEO
Speaker 1: of Celsius, he basically said that, you know, if you
Speaker 1: put your money in a bank. You're basically going to
Speaker 1: get this tiny little interest if any. But you know,
Speaker 1: it's a smart financial move for you to come to
Speaker 1: Celsius and actually earn and much higher yield with you know,
Speaker 1: he said low risk. If I wanted to borrow money
Speaker 1: from Celsius, what would I do? So you would come
Speaker 1: to Celsius, And it depended on who you were. Basically,
Speaker 1: sometimes people had to put up collateral to borrow from Celsius,
Speaker 1: but sometimes, as we found out more recently, they didn't
Speaker 1: have to put up collateral, or not as much collateral.
Speaker 1: As you know, some customers who kept their funds on
Speaker 1: Celsius thought they needed to put up And so that
Speaker 1: brings us to this Examiner report that came out in
Speaker 1: January that sort of uncovered that there were a lot
Speaker 1: of discrepancies in between institutional for instance, and retail borers
Speaker 1: at Celsius. So when we talk about collateral, because I
Speaker 1: think this is a really important point and you know,
Speaker 1: it gets to the heart of as you say, this
Speaker 1: report that was published just recently, when you talk about
Speaker 1: collateral in a traditional loan context, that's like, if I
Speaker 1: want to borrow money to buy a house, I have
Speaker 1: to pledge some kind of asset in return. That might
Speaker 1: be a down payment, that might be some other asset
Speaker 1: that I have. But if I were very wealthy and
Speaker 1: I owned, say, you know, millions and millions of dollars
Speaker 1: worth of shares, I could pledge those shares as collateral
Speaker 1: if I wanted to borrow money to do something else
Speaker 1: like build a spaceship or whatever it is that really
Speaker 1: wealthy people do with their billions of dollars. But the
Speaker 1: idea is that in the case that I didn't pay
Speaker 1: my loan back, the bank or the person who let
Speaker 1: me money would have a way to at least cover
Speaker 1: the losses. Is that roughly how that works. Absolutely, and
Speaker 1: it worked very differently on Celsius. Let me give you
Speaker 1: one example. So, for instance, FTX, they change that when
Speaker 1: bankrupt last November, would borrow coins from Celsius and it
Speaker 1: would put up its own FTT token, which FTX is
Speaker 1: should as collateral. Now we know because FTX collapsed in
Speaker 1: November that you know, the value FTT tokens was very questionable,
Speaker 1: and actually people inside of Celsius knew that as well,
Speaker 1: that it was questionable and probably you know, should not
Speaker 1: be accepted as collateral, but it was still accepted as collateral.
Speaker 1: So those are the type of transactions that Celsius had facilitated.
Speaker 1: When I was reading the Examiner report, like one of
Speaker 1: the things that really jumped out to me was this
Speaker 1: idea that this wasn't something that happened recently. It's not
Speaker 1: that these standards only eroded in twenty twenty one or
Speaker 1: twenty twenty two before they filed for bankruptcy. It sounded
Speaker 1: like there had been a real pattern of having less
Speaker 1: than robust risk management for a much longer time. Absolutely
Speaker 1: so machine Ski and his co founder they came up
Speaker 1: with the idea for Celsius in twenty seventeen, and this
Speaker 1: company was the service was launched in twenty eighteen. And
Speaker 1: actually some risk control policies well they were not even imposed,
Speaker 1: they were just there was I think more of a
Speaker 1: pretense of imposing risk controls. But that only started in
Speaker 1: twenty twenty one, according to the Examiner report. And so
Speaker 1: one thing that they examined a highlighted throughout this, you know,
Speaker 1: almost seven hundred page report, is that this company they
Speaker 1: had trouble with accounting, they had trouble with pain taxes,
Speaker 1: they had trouble with risk controls. I mean they used
Speaker 1: quick books and Google spreadsheets to keep track of the
Speaker 1: coins that were you know, lent and borrowed. And obviously
Speaker 1: quick books is for small to mid sized businesses, and
Speaker 1: you know, right, everyone's apparently exactly and the examiner couldn't
Speaker 1: even find a lot of the older record keeping. It
Speaker 1: does not exist, apparently. And the risk controlled policies, you know,
Speaker 1: when when internal people were suggesting some of this risk
Speaker 1: control measures which are pretty standard that were not implemented.
Speaker 1: A lot of them were sort of not implemented even
Speaker 1: after the suggestions have been made and issues have been raised.
Speaker 1: You know, Alex Maschinski, according to the examiner's report, was
Speaker 1: very focused on pretty much just growing the user base
Speaker 1: of Celsius and not on anything. Well, how does that
Speaker 1: contrast with what Maschinsky was telling customers at the time.
Speaker 1: So at the time and actually, you know, up until
Speaker 1: self is froze withdrawals on June twelfth of last year,
Speaker 1: essentially machine Ski was telling everybody we have enough funds,
Speaker 1: we have all the funds we need to reimburse everybody.
Speaker 1: You know, everything is fine. And for actually several months
Speaker 1: before then, things actually for many months before then, things
Speaker 1: were not fine. Celsius was recording massive losses. It was
Speaker 1: spending customer and investor money to prop up its own
Speaker 1: cell token. And when things went south last May, when
Speaker 1: the Terra blockchain collapsed, this was sort of just the
Speaker 1: last nail in the coffin. But Celsius filed for bankruptcy
Speaker 1: with a hole in its balance sheet of more than
Speaker 1: a billion dollars. But you know, a lot of this
Speaker 1: whole actually happened way earlier than May. Everything that could
Speaker 1: have gone wrong with this business pretty much. Did you know,
Speaker 1: they borrowed money from a lender and then the lender
Speaker 1: refused to give them their collateral back, for example, or
Speaker 1: they entrusted their you know, thousands of ether too, somebody
Speaker 1: who lost access to that ether. You know, all kinds
Speaker 1: of strange things happened in this business. And I think
Speaker 1: partially this goes back to what you said, you know,
Speaker 1: the lack of risk controls and the business wasn't managed well.
Speaker 1: Now you've been a reporter for a long time, I
Speaker 1: feel like you've heard people say this before. But yeah,
Speaker 1: this time, for sure, we're going to pay attention to
Speaker 1: the fundamentals. We're not going to just try to chase
Speaker 1: after the thing that everybody's chasing at. We're not going
Speaker 1: to overpay for deals. We're going to be really thoughtful
Speaker 1: and deliberate and really care about risk. And then like
Speaker 1: three years later everything blows up again. Oh absolutely. I
Speaker 1: mean we saw this with initial coin offerings, where vcs
Speaker 1: were front and center in a lot of them, you know,
Speaker 1: and made a lot of money on icos before that
Speaker 1: whole space sort of collapsed because of enforcement and regulation,
Speaker 1: and actually many vcs ended up just escaping with the
Speaker 1: money they made, and a lot of the retail users
Speaker 1: ended up losing all of their money and getting hurt.
Speaker 1: And I think that's what happened last year again with
Speaker 1: the collapse of a lot of this crypto lenders, where
Speaker 1: you know, just regular a lot of regular people last
Speaker 1: everything they had. So I totally agree with you that
Speaker 1: I think is just memories are short up. Next, more
Speaker 1: from Bloomberg reported Ubercarif on why Celsius mathos in the
Speaker 1: crypto ecosystem. We'll be right back. I want to go
Speaker 1: back to something else. This idea of Celsius new Or
Speaker 1: believed that they owned customer tokens even while they were
Speaker 1: seeing the customers. No, no, no, these are always going
Speaker 1: to be your assets. Why has this become important in
Speaker 1: the bankruptcy fight? During sort of YouTube videos and all
Speaker 1: kinds of weekly you know, talks that Machine Ski did
Speaker 1: with users, he very frequently said that the sayo tokens,
Speaker 1: you know, we don't own them. You or the users
Speaker 1: own them. But many users, turns out, hadn't read Celsius's
Speaker 1: terms of service, at least in the state that they
Speaker 1: were in in the last couple of years. And by
Speaker 1: the way, the terms of service, there were so many
Speaker 1: versions of those it actually was part of the big
Speaker 1: part of the proceedings initially, you know, just trying to
Speaker 1: find all these different versions of terms of service. But
Speaker 1: in the terms of service it specifically stated that the
Speaker 1: users tokens if they sit in certain of the more
Speaker 1: popular Celsius accounts called Urn. In the scenario, Celsius basically
Speaker 1: owns the tokens. And when Celsius when bankrupt, what that
Speaker 1: meant is that all of the users whose funds were
Speaker 1: in the earn accounts, they became unsecured creditors. And obviously,
Speaker 1: and the judge actually ruled that the tokens do belong
Speaker 1: to selsius the company versus the users, and so that
Speaker 1: essentially dramatically reduced the amount of recovery available to those users,
Speaker 1: right because unsecured creditors, which is, you know, just like
Speaker 1: a jargon for your very low down in the repayment order, Like,
Speaker 1: if there's enough assets after we've paid everybody else in
Speaker 1: this long list above, you great, But otherwise you're probably
Speaker 1: not going to get very much, if you get anything
Speaker 1: at all. Now, most people do not read terms of service,
Speaker 1: very true. You sign up for something, you open a
Speaker 1: bank account, you've download a random app onto your phone
Speaker 1: from an app store, and there's like, yeah, yeah, yeah,
Speaker 1: I've totally read the terms of service. Tick this box,
Speaker 1: move on, happily. Most people do not read the terms
Speaker 1: of service. Do you think people are going to start
Speaker 1: paying more attention to these kinds of things because of
Speaker 1: these collapses, because of how many folks have lost money
Speaker 1: as a result of them. You know, after reading the
Speaker 1: Examiner street Port, I might be more inclined to read
Speaker 1: terms of service, but you know, realistically, we are so
Speaker 1: busy with our lives, right with everything we do. I mean,
Speaker 1: who has the time to read you know, the tens
Speaker 1: or hundreds of pages in there. And plus they're not lawyers.
Speaker 1: We you know, not everybody can understand the legalist that's
Speaker 1: in the terms of service. And I think it's a
Speaker 1: real problem because you know, I imagine that if a
Speaker 1: CEO of a company during a YouTube video tells you
Speaker 1: that this is how things are, you know, most people
Speaker 1: will will trust what this person will say and sign
Speaker 1: up for the service, imagining that this is what they're
Speaker 1: going to get in the end. But that's certainly not
Speaker 1: the case, as Celsius showed us. And this is exactly
Speaker 1: why various regulators around the world are starting to emphasize
Speaker 1: this idea of should there be better consumer protections for
Speaker 1: people who are investing in crypto because the assumption that
Speaker 1: companies are doing appropriate risk management, or even that customers
Speaker 1: are doing appropriate personal risk management is turning out not
Speaker 1: to be founded on reality in some of these cases. Absolutely.
Speaker 1: I mean, over the last year, so many companies went
Speaker 1: bankrupt and so many hundreds of thousands of users lost
Speaker 1: money here in the US because of this. I think
Speaker 1: this left basically a lot of the regulators here with
Speaker 1: you know, essentially a black eye. You know, where were
Speaker 1: they when all of this stuff was happening now. I
Speaker 1: started this episode by saying that we're not going to
Speaker 1: talk about FTX, and people will be like, oh, why
Speaker 1: fts is so interesting? What should people understand about these
Speaker 1: other companies in the crypto ecosystem, companies like Celsius and
Speaker 1: why they are and continue to be important in order
Speaker 1: to really get a sense of how this overall mark
Speaker 1: please operates. You know, like any other markets, crypto I
Speaker 1: think thrives on on essentially leverage. You know, a lot
Speaker 1: of people enter this market via leverage, where they would
Speaker 1: you know, put some money down on a crypto exchange
Speaker 1: and make bets with you know, a much much larger
Speaker 1: amount of money. If they lose their bed, they're sort
Speaker 1: of collateral, if you will, will evaporate. So a lot
Speaker 1: of people have been doing this encrypto for a while,
Speaker 1: for a number of years, and what the scrypto lenders
Speaker 1: allowed people to do is to even do more complex
Speaker 1: sort of borrowing and blending strategies and allowed more people
Speaker 1: to access to leverage. And you know, while I would
Speaker 1: say most most of the scrypto lenders win bankrupt last ye,
Speaker 1: not all of them. The fact of the matter remains
Speaker 1: that I think people will find out a way to
Speaker 1: gain leverage in this market as they have another as well,
Speaker 1: and you know, I think it's just behooves regulators to
Speaker 1: stay on top of this. Well. On that cheery note,
Speaker 1: thank you very much, Olger. It's always a pleasure to
Speaker 1: have you on the show. It was my pleasure. I
Speaker 1: so appreciate you hapving me on. That was Bloomberg reporto Ogokarf.
Speaker 1: You can find more of her reporting on the Bloomberg
Speaker 1: terminal and on Bloomberg dot com. And if you're interested
Speaker 1: in all things bankruptcy, because come on, we talk about
Speaker 1: it a lot on the show, you should check out
Speaker 1: a new newsletter from our colleagues. It's called The Brink.
Speaker 1: It's as exciting as it sounds. You can find it
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