Alan Knitowski 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. That didn’t stop them from being scammed by crypto companies.
Knitowski borrowed $375,000 from crypto lender Celsius over the years and sent $1.5 million in bitcoin as a guarantee. He doesn’t want to sell bitcoin because he likes it as an investment and believes it will go up in value.
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It is the Celsius model. Cryptocurrency investors can keep ownership with the company in exchange for a dollar loan that they can use. Knitowski will get his bitcoins back when he pays off the loan.
But that’s not the case, because Celsius, which at the beginning of the year managed $12 billion in assets, spiraled into bankruptcy in July after a plunge in crypto prices caused an industry liquidity crisis. Knitowski and thousands of other borrowers have more than $812 million in collateral locked up on the platform, and bankruptcy records show Celsius has failed to return collateral to borrowers despite defaulting on loans.
“Every aspect of what we did was wrong,” Knitowski, who runs the Austin, Texas-based company, said. Phunware, said in an interview. “If the CFO or I actually do anything that looks like this, we will be prosecuted immediately.”
Creditors are currently working through bankruptcy proceedings to try and recover at least part of the funds. They were given some measure of optimism on Friday, after Celsius announced the sale of an asset custody platform called GK8 to Galaxy Digital.
David Adler, a bankruptcy attorney at McCarter & English who represents Celsius’ creditors, said the money from the transaction will be used to pay legal fees. In addition, there may be funds for former customers.
“The big question is – who has the right to get the money from GK8?” Adler told CNBC. Adler said he represents a group of 75 borrowers who have about $100 million in digital assets on the Celsius platform.
Later this month, more relief could come as the offering will open Celsius’ debt portfolio. If another company buys the loan, the customer will have the opportunity to repay and then the collateral will be released.
Knitowski told CNBC he had chosen to take out the loan at a 25% loan-to-value rate. That means if he took out a $25,000 loan, he would guarantee four times that, or $100,000.
The more collateral the borrower is willing to post, the lower the interest rate on the loan. If the borrower is unable to repay the loan, the borrower can seize the collateral and sell it to cover the costs. It’s like a home mortgage, where the borrower uses the home as collateral. In the crypto world, borrowers can apply for a loan and pledge bitcoins as collateral.
Earlier this year, when the price of bitcoin fell, Knitowski paid off one of Celsius’s loans to avoid margin and had to increase collateral. But after doing so, the company did not return the bitcoins that served as collateral for the loan. Instead, the assets are kept in an account called “Acquired.” According to the company’s terms and conditions, the assets in the account are the property of Celsius, not the customer.
“Imagine you paid off your car, but someone kept it,” Knitowski said. “You pay off your house, but someone keeps it. In this case, it’s like paying off a loan. However, you don’t get any collateral even after it’s paid off.”
Failed to open
It’s not the only problem. The crypto platform also failed to provide borrowers with full federal Truth in Lending Act (TILA) disclosures, according to former employees and an email sent to customers on July 4. , such as the annual percentage rate (APR), the loan term, and the total cost of borrowing.
The email to borrowers said, “disclosures that must be provided to you under the federal Truth in Lending Act do not include one or more of the following,” and then went on to list more than a dozen missing disclosures.
A former Celsius employee, who asked to remain anonymous, told CNBC that the company is retroactively trying to comply with TILA.
“You can’t say, ‘Oh, oops, we forgot like 25 items in the Truth in Lending Act and, as a result, we’re just going to redo it and pray,'” Knitowski said.
Jefferson Nunn, 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 these assets are not available now even if he pays off the loan.
Nunn, who lives in Dallas, said he got a loan to invest more bitcoins after seeing a promotion for the platform. He said he heard about Celsius after doing a podcast with Nuke co-founder Goldstein. At the event, Goldstein said, “your funds are safe,” Nunn said. Alex Mashinsky, the former CEO of Celsius, made similar comments shortly before ending the withdrawal.
Alex Mashinsky, CEO of Celsius on stage in Lisbon for Web Summit 2021
Piaras Ó Mídheach | Sportsfile | Getty Images
“It’s a mess and my funds are still locked up there,” Nunn said.
The theme has come up repeatedly in crypto, most recently with failed last month of FTX. Sam Bankman-Fried, the founder and CEO of the exchange, told his followers on Twitter that the company’s assets are good. A day later, he was looking for a rescue package in the middle of a liquidity crisis.
While the Celsius implosion did not bring the magnitude of FTX, which is now valued at $32 billion, the company’s management has faced criticism. According to a court filing in October, top executives take out millions of dollars in assets before the company stops withdrawing customer funds.
A former employee, who asked not to be named, said there was a lack of financial supervision that led to a significant hole in the company’s balance sheet. One of the biggest problems is that Celsius has synthetic shorts, which happen when a company’s assets and liabilities don’t match.
The former employee told CNBC that when customers deposit crypto assets with Celsius, it is to ensure that the funds are available whenever the customer wants to withdraw. However, Celsius takes customer deposits and lends them to risky platforms, so it doesn’t have the liquidity to generate the funds it wants.
As a result, when customers want to withdraw funds, Celsius will scramble to buy assets on the open market, often at a premium, the people said.
“It was a huge error in judgment and operational control that really hurt the organization’s balance sheet,” the former employee said.
He also said that Celsius is collecting worthless cryptocurrency tokens as collateral. On the platform, Celsius states that customers can “earn crypto compounding rewards in BTC, ETH, and 40+ other cryptocurrencies.” But according to a former employee, the team responsible for distributing the coin had nowhere to go with so many obscure tokens.
The former employee said he left Celsius after discovering the company was being unwise with customer funds and making risky bets to continue to deliver the returns promised to depositors.
“A lot of people are taking all their money out of the traditional banking system and trusting Alex Mashinsky,” the person said. “And now they can’t pay their medical bills, pay their marriages, their mortgages, their pensions, and it continues for me and my colleagues who have left the organization.”
Celsius did not respond to multiple requests for comment. Mashinsky, sing retreat of Celsius in September, declined to comment.
