The ruling underscores the Wild West nature of the unregulated crypto industry. On Thursday, the Attorney General of New York Letitia James was moved to impose a kind of order, or at least legal repercussions, in Celsius founder Alex Mashinsky, which he accused in a lawsuit of defrauding hundreds of thousands of consumers.
Crypto fortunes have been on the decline in recent months since Celsius became the first major crypto platform erupt last year, bankruptcy in July freezing at least $4.2 billion for 600,000 Americans, according to court papers, and foreshadowing collapsed from FTX four months later.
And while Glenn’s ruling won’t affect FTX, whose terms of use are different, some analysts see the ruling spreading beyond Celsius.
“There are many other platforms that display the same terms of use as Celsius,” said Aaron Kaplan, an attorney with the financial-focused firm Gusrae Kaplan Nusbaum and co-founder of his own crypto company. Customers should “understand the risks they take when committing assets to unregulated platforms,” he said.
James’ lawsuit, meanwhile, alleges that Mashinsky used “false and misleading representations to induce. [customers] to deposit billions of dollars in digital assets. The suit seeks unspecified damages from Mashinsky and seeks to bar him from various financial and other jobs in New York.
Celsius spokesman Luke Wolf said Mashinsky was not involved in the company’s management. Mashinsky did not respond to messages seeking comment.
For years, Celsius promised exorbitant interest rates in the neighborhood of 20 percent for those in the fantasy version of the real bank, driving many who had no interest in crypto to enter the market.
The suit says Mashinsky was the reason. “In hundreds of interviews, blog posts, and livestreams,” he said, “Mashinsky promoted Celsius as a safe alternative to banks while hiding that Celsius actually engaged in risky investment strategies.”
Mashinsky is known for regular “Ask Mashinsky Anything” online Q&As and T-shirts with messages such as “Banks Are Not Your Friend.” Mobs of fans on YouTube and Twitter praise the cult of “The Machine,” as he is nicknamed. If FTX Sam Bankman-Fried as the public face of crypto in the halls of Washington, Mashinsky is often the most important symbol for ordinary investors.
The suit paints a picture of a man who wants to see himself as a hero to the unbanked and working class when most of his money is used to finance risky investments.
“Positioning himself and his company as a modern-day Robin Hood, Mashinsky boasted that Celsius ‘produces … for people who would not be able to do it themselves, [and] we take from the rich,’” jas jas. “These promises are false.”
However, according to the bankruptcy court, there may be limits to what the legal system can do when crypto companies are smart enough to protect themselves. Investors and some countries that have joined the movement say the language is at least “ambiguous” in the rights given to Celsius. But Glenn disagreed.
Attorneys for Celsius, Joshua Sussberg and Patrick J. Nash Jr., and attorneys for creditors, Gregory Pesce and Andrea Amulic, did not respond to requests for comment.
The bankruptcy ruling specifically focused on whether Celsius as part of its current restructuring could sell $18 million in stablecoins, a type of virtual currency, to help it stay solvent. But the implications are far greater. By ruling that the money in the account does not belong to the 600,000 account holders, the court is essentially saying that it is now only an unsecured creditor. And “no price is fair enough to repay,” Glenn wrote.
The effect may extend to them to affect other crypto platforms with strict language in the fine print – presenting problems to customers in the event of a collapse.
“It just raises another question about how difficult it is to transact in the crypto Wild West,” said Brian Marks, who teaches economics and business law at the Pompea College of Business at the University of New Haven and has studied the Celsius case. “I wouldn’t be surprised to see other companies reconsider their terms and conditions after this.”
The connections between crypto companies are numerous, and the failure of one can ripple into another, even months later. On Thursday, crypto lender Genesis said it will lay off 30 percent of its staff, partly as a result of a loan to FTX’s sister firm Alameda Research.
Celsius creditors are also affected by FTX’s bankruptcy. Mashinsky’s former firm, the New York lawsuit revealed, had lent $1 billion to Alameda collateralized with FTX token FTT.
“The value of FTT has since fallen by about 95%,” he said, “leaving Celsius holding a nearly worthless bond.”
