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NY Attorney Gen sues former Celsius CEO Alex Mashinsky over alleged crypto fraud

NY Attorney Gen sues former Celsius CEO Alex Mashinsky over alleged crypto fraud
Photo Credit: Pixabay
6 Jan, 2023
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The state of New York and attorney general Letitia James filed a lawsuit against Alex Mashinsky, the co-founder and former CEO of collapsed cryptocurrency company Celsius Network. The lawsuit, filed on 5 January, claimed that Mashinsky and Celsius "defrauded hundreds of thousands of investors by inducing them to deposit billions of dollars in digital assets with his crypto firm". 

Meanwhile, a US bankruptcy judge ruled on Wednesday that Celsius Network owns most of the cryptocurrency that customers deposited into its online platform. The judge, Martin Glenn, found that Celsius’ terms of use - which he doubt most people read - meant “the cryptocurrency assets became Celsius’ property.” That said, it will be a big challenge for most Celsius customers to get repayment in the crypto lender's bankruptcy. 

The lawsuit alleged that "Mashinsky repeatedly made false and misleading statements about Celsius’ safety to encourage investors to deposit billions of dollars in digital assets onto the platform". Through her lawsuit, Attorney General James seeks to permanently bar Mashinsky from engaging in any business relating to the issuance, offer, or sale of securities or commodities as well as stop him from serving as a director or officer of any company doing business in New York. It also seeks damages and restitution for investors. 

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Founded in 2017, Celsius is a borrowing and lending platform for digital assets like Bitcoin, Ethereum and other crypto currencies, where investors could deposit their cryptocurrency in return of high yields on those digital assets. 

Mashinsky, a native of Ukraine whose family immigrated to Israel, visited New York in 1988 and eventually moved to the city in search of a ‘better life’. Since then, he has founded eight companies, including Arbinet, which went public in 2004, and Transit Wireless, which provides Wi-Fi to the New York City subway. The entrepreneur claims to have created Voice over Internet Protocol (VoIP), a precursor to ride-sharing app Uber, as well as an idea for a cryptocurrency that preceded Bitcoin. 

Mashinsky stepped into crypto business in 2017, when his venture fund Governing Dynamics brought on blockchain firm MicroMoney as a strategic partner. Same year he founded Celsius. 

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Mashinsky was Celsius’ public face, appearing regularly in interviews, at cryptocurrency conferences, and on social media to promote the platform and recruit investors. As CEO, he hosted "Ask Mashinsky Anything", a weekly YouTube livestream in which he answered questions about Celsius. He became known for wearing T-shirts reading "Banks are not your friends", for his critical comments about unsuccessful businesses (including his own), and for publicity stunts such as an attempt to vandalise a branch of Chase Bank.  

In January 2022, Mashinsky took control of Celsius' trading strategy and reportedly withdrew $10 million from the company's funds in May 2022. On July 13, 2022, Celsius filed for Chapter 11 bankruptcy. A report by the Financial Times published in July 2022 suggests that the funds were used for tax payments and estate planning. In total, Arkham Intelligence estimates that Mashinsky sold $44 million worth of CEL tokens through exchanges.  
“Former employees and internal documents suggest a reckless pursuit of high returns put the company in a poor position to ride out this year’s market turbulence,” the article said. 

Mashinsky resigned as Celsius CEO on September 27, 2022, with Chris Ferraro, the former CFO of Celsius, appointed to replace him as interim CEO.  
The collapse of Celsius has left many individuals in financial ruin, not just in the US, but globally too including in India, with many losing a significant part of their investment. 

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The last one year had been a challenging one for the crypto industry. The collapse of stablecoin called TerraUSD in July, exit of top crypto CEOs and also the bankruptcy of crypto hedge fund Three Arrows Capital and crypto lenders Voyager Digital sent shockwaves to the industry.  

More recently, the collapse of FTX and the resignation of its CEO Sam Bankman-Fried, who’s been accused of various criminal charges, and the recent case of Celsius’ Mashinsky further shed light on the unpredictability of the crypto market and how it dragged down many investors with it.