Celsius Employees May Have Committed Fraud: Crypto Analyst

Crypto lending and interest-bearing account service Celsius Network CEL/USD halted withdrawals as blockchain analysis suggested the company's investment choices caused a liquidity crisis.

Now employees may be facing legal consequences after committing fraud in an attempt to contain the firm's troubles, according to the analysts who blew the whistle on liquidity crisis concerns.

What Happened: Users took to Twitter Inc. TWTR to discuss the possible fallout for Celsius. 

CryptoJoe, the pseudonymous crypto Twitter personality who took part in the research revealing Celsius' illiquidity, said: "Celsius members could face jail time given the nature of this debacle."

Blocking margin repayments would constitute a form of financial fraud if users are not compensated for liquidations that they could not avoid due to the restrictions imposed by the company, he said. 

CryptoJoe and his fellow on-chain analyst Riley said that while the company claims to have about $10 billion of total value locked on the platform, they were only able to find $2 billion through their on-chain analysis.

Still, they pointed out that such analysis cannot uncover coins held in centralized finance services such as crypto exchanges, and their analysis is not guaranteed to have uncovered all of Celsius' holdings.

Despite those doubts, the analysts said that in the best-case scenario, Celsius is "functionally insolvent due to illiquidity issues surrounding their holdings" such as excessive Staked Ethereum (CRYPTO: stETH) holdings. In the worst case, the company is "insolvent and lost users' funds in hacks" and the TerraUSD UST/USD collapse.

They added in a joint statement:

"Whether or not their assets meet their liabilities to the full extent is a difficult question to answer in certainty, given the opaqueness of reporting."

What's Next? The two also expect that Celsius is likely to become a forced seller of stETH, further lowering its price compared to the Ethereum ETH/USD to which it holds the keys.

According to CryptoJoe and Riley, multiple Celsius competitors could face pressures if a continued downturn causes liquidations in the crypto market to increase further.

BlockFi in particular could see trouble, having sustained a $350-million loss from its Grayscale Bitcoin Trust GBTC holdings and reportedly lending to insolvent funds such as Three Arrows Capital.