Episode 85 – Celsius Network: A Pyramid of Ponzis

Celsius Network: a Pyramid of Ponzis Crypto Critics' Corner

Today Bennett and Cas talk about a civil suit brought by a former contracted employee of Celsius Network against the entity itself claiming that Celsius Network has, effectively, been run as a Ponzi scheme (and doesn't have the funds to pay back its debts). This episode was recorded on July 7th (before Celsius Network filed for Chapter 11 bankruptcy protection) and was produced by Asher Hirsch.

In this episode Bennett Tomlin and Cas Piancey discuss a lawsuit against Celsius Networks by a former trader accusing them of being a Ponzi scheme.

This episode was recorded on July 8th, 2022.

Other episodes mentioned in this episode:

Other resources mentioned in this episode:

NFTs 0xb1 Definitely Sent Krissy

NFTs Allegedly Sent from 0xb1 to Krissy

Beeple artwork of bull colored like American flag with twitter bird on top saying :poop_emoji:
https://etherscan.io/nft/0x12f28e2106ce8fd8464885b80ea865e98b465149/100030005
https://etherscan.io/nft/0xd92e44ac213b9ebda0178e1523cc0ce177b7fa96/100010120
https://etherscan.io/nft/0xd92e44ac213b9ebda0178e1523cc0ce177b7fa96/100020056
https://etherscan.io/nft/0xd92e44ac213b9ebda0178e1523cc0ce177b7fa96/100030042 https://etherscan.io/nft/0xd92e44ac213b9ebda0178e1523cc0ce177b7fa96/100030080

Where to find Crypto Critics’ Corner:

This episode was edited and produced by Asher Hirsch.

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English Transcript:

00:00:05:10 - 00:00:13:17
Cas Piancey
Welcome back, everyone. I am Cas Piancey and I'm joined, as usual, by my partner in crime, Mr. Bennett Tomlin. How are you today?

00:00:13:24 - 00:00:14:25
Bennett Tomlin
I'm doing well. How are you?

00:00:14:28 - 00:00:18:29
Cas Piancey
Yes, I'm doing pretty good today. We're here to discuss.

00:00:20:15 - 00:00:24:14
Bennett Tomlin
A lawsuit against Celsius by a former trader who is employed by them.

00:00:24:15 - 00:00:58:07
Cas Piancey
So this is KeyFi Inc versus Celsius network. The plaintiff is KeyFi and the defendant is Celsius network. First of all, I want to start this out by saying even from someone who is not a lawyer, that the lawsuit is so silly that it's both egregious and crazy and believable, but also insane. So I want to start this out by letting everybody know that this this lawsuit itself starts out as a handshake deal between two parties.

00:00:59:02 - 00:01:22:04
Cas Piancey
Look, I don't know anything about business. I don't know anything about lawsuits. We are lawyers. But as much as I don't know about law or business, here's what I'll say. You're doing $1,000,000,000 deal with a company. Don't do a handshake deal. It's pretty much that simple. Get it into a contract. A contract for a $10,000 deal. Why wouldn't you?

00:01:22:05 - 00:01:40:06
Cas Piancey
Contractual. $1,000,000,000 deal? I don't know. And I'm sure that I couldn't tell you the answer to that in regards to this. But this lawsuit is far outside the scope of that. So, Bennett, tell us and talk to us about all the ridiculous ness of what this lawsuit fully presents.

00:01:40:15 - 00:02:07:13
Bennett Tomlin
Well, I'm not going to get into all of it just in this initial intro. But you're right. This whole thing is just layers of absurdity piled on top of each other. Like you mentioned, it was a handshake deal where they were managing hundreds of millions of dollars of funds, which is unfortunately not unheard of in crypto as we discuss in episodes one, two and three with Bitfinex and Tether giving about a little over $1,000,000,000 actually to Crypto Capital Corp without ever signing a contract of any sort.

00:02:07:28 - 00:02:30:16
Bennett Tomlin
So it's certainly not unheard of, but it's also definitely not a best practice. And so Jason Stone @0x_b1 on Twitter started a cryptocurrency company called KeyFi, which was handling staking a little bit of some other stuff like that until Mashinsky somehow became aware of them and decided to bring them into the fold to help manage Celsius his defi activities for them.

00:02:31:11 - 00:02:56:13
Bennett Tomlin
There's a lot of different details and allegations in the suit and we'll get into more of them throughout this episode. But this arrangement was weird from the start. Celsius set up this 0xb1 address and started transferring hundreds of millions of dollars of customer funds. And then they would have Jason basically use a VPN to remotely access the computer that the keys were stored on from which he would then make the transactions.

00:02:57:00 - 00:03:17:16
Bennett Tomlin
He was supposed to be paid a portion of the profits he earned in doing these activities, and was also apparently told by Celsius that he didn't need to worry about hedging because they were taking care of all of the hedging and their side. Listen, I'm not a trader. There's a lot of things we aren't. We're just going to list all the things we aren't on this episode and traders among them.

00:03:18:10 - 00:03:45:00
Bennett Tomlin
I'm not an expert on hedging strategies, but like he complains at one point in this lawsuit that they had not sufficiently hedged for the potential impermanent loss as he withdrew all of his funds from the illiquid shitcoins that he had been yield farming. There's a lot of this that is really, really weird, like the fact that he could only use these wallets remotely, had to go into Celsius to do it, that he believed they had some team hedging it all.

00:03:45:00 - 00:04:17:17
Cas Piancey
Now I specifically asked you a question. This is point number, if I'm correct, number 39 on this lawsuit. This is the first time I find myself a little bit confused. It says at all times Celsius, maintain complete control over the 0xb1 account. Indeed, for most of the time that Stone worked with Celsius, he could only access the 0xb1 account by using a VPN to log into a computer controlled by Celsius that was already logged into the 0xb1 account.

00:04:17:27 - 00:04:28:04
Cas Piancey
Now I understand what that means in terms of remote access. That part I totally understand. Why is he having to use a VPN to log in under remote access.

00:04:28:05 - 00:04:44:21
Bennett Tomlin
Just to make it safe and secure so that his computer, wherever he's at, which is not close to where this physical computer is at, has a safe network tunnel to transmit packets from his location to Celsius, his network, where they've got more control over the security implementation and stuff.

00:04:44:21 - 00:04:55:10
Cas Piancey
So as far as we know, he's accessing this these hundreds of millions of dollars that have been granted to him by Celsius via a laptop in a coffee shop, for all we know. Is that right?

00:04:55:16 - 00:05:16:10
Bennett Tomlin
Oh, yeah. He could theoretically be using a laptop, but I think that the computer in Celsius, his end is probably as part of their corporate network. Who cares? Yeah, and that's. It feels weird. It's a very strange way to be handling hundreds of millions of dollars of customer funds and like this is. The other weird part is like in the lawsuit, he complains that Celsius told him they were using these hedging strategies and stuff.

00:05:16:20 - 00:05:34:06
Bennett Tomlin
But like if Celsius had a team of like quants and traders who are capable of hedging against all of the impermanent loss and the other things, well, he's yield farming these shitcoin farms. They wouldn't need him, right? Like if they had the people who are capable of doing this kind of advanced hedging strategies, they never would have had to brought him in.

00:05:34:20 - 00:06:05:20
Bennett Tomlin
And like even the like we're talking about this weird private access to the computer that was true up until Celsius got hacked via DNS attack. And then at that point, they just gave him the private keys. They just shared the keys with Jason. So like, that's honestly even worse to me than like Celsius making him log in and being able to have some control over the computer it's happening in is they just gave this guy before there was a signed agreement, as far as I can tell, the private keys to a wallet they're depositing hundreds of millions of dollars of customer funds into.

00:06:06:06 - 00:06:07:11
Bennett Tomlin
That's insane.

00:06:08:02 - 00:06:31:01
Cas Piancey
Okay, so hold on. Hold on. Wow. Bennett I'm suddenly realizing how far outside the scope of not just normal finance, but just just reality we are right now. And I want to I want to slow us down here for a second and point our listeners to a couple of things. One, in episode 26, we talk about DeFi and lending platforms that are utilizing Defi like Celsius.

00:06:31:16 - 00:06:57:00
Cas Piancey
We also mentioned Nexo and BlockFi, BlockFi has been in trouble. Nexo says they're not in trouble, but at least two out of three of the companies that we mentioned in that episode have talked about how they are now in trouble in episode, I believe, 79. We talked to Mike Burgersberg, who was one of the people who was talking about how systemic and scary Celsius is risks were as a lending platform.

00:06:57:09 - 00:07:24:11
Cas Piancey
So for anyone that needs to catch up on the deeper tidbits of this doesn't understand what even Celsius network is. I urge you to listen to those episodes. They're worth listening to. Obviously, I have a bias there, but I think we need to quickly just go over what Celsius network was promising to customers and what this gentleman, Jason Stone and KeyFi or whatever was doing.

00:07:24:16 - 00:07:32:06
Cas Piancey
What even was this that was happening and why is it related to all the yields that were being promised during DeFi summer?

00:07:32:13 - 00:07:57:26
Bennett Tomlin
So Celsius promised to pay their customers a yield if they deposited their cryptocurrencies in their right? Nominally as a cryptocurrency lending platform, this yield was supposed to be generated by servicing other people who wanted to borrow cryptocurrencies. Right? Borrowing and lending. They make two sides of the thing. Everyone's happy. But there wasn't enough interest in borrowing cryptocurrencies in order to pay the rates that Celsius wanted to pay to attract more customers.

00:07:58:06 - 00:08:28:13
Bennett Tomlin
And so just I'm going to read directly from the lawsuit here because it's stunning. In 2020, Stone spoke with Mashinsky and other managers of Celsius numerous times to discuss the possibility of Celsius using KeyFi's expertise to deploy advanced strategies to make money on its customer deposits. That summer, plaintiff and Celsius cut a handshake deal where plaintiff would manage billions of dollars in customer crypto deposits in return for a share of the profits generated from those crypto deposits.

00:08:28:23 - 00:08:51:03
Bennett Tomlin
That continues on point 38 on or around August 19, 2020, without a formal agreement in place. Celsius began transferring hundreds of millions of dollars in crypto assets to Stone and his team. Celsius created a new Ethereum wallet address referred to as the 0xb1 account and transferred nearly all the assets. Stone was to deploy into that address.

00:08:51:19 - 00:09:15:19
Bennett Tomlin
Celsius wanted to pay higher yields than their lending and borrowing business could maintain. So they brought on this random guy who had done a little bit in cryptocurrency before to effectively take their customer deposits and deposit them into these yield farms. As you mentioned, Summer of Defi that we're all doing these wild dilutive tokenonomics where they would print a whole bunch of new tokens, give them out at the beginning.

00:09:15:19 - 00:09:32:21
Bennett Tomlin
And if you got in early and sold quick enough, there was a period where people were making a lot of money. But like fundamentally yield farming strategies are not a value creation or value accrual mechanism, right? It's dilution of the token supply. It's it's it's Ponzinomics.

00:09:32:23 - 00:09:45:27
Cas Piancey
There we go. There we go. It's a Ponzi scheme. Let's not call it ponzinomics, please. It's not ponzinomics. It's a fucking Ponzi scheme. I'm so tired of this bullshit, dude.

00:09:45:27 - 00:10:12:11
Bennett Tomlin
And at 0xb1 at 0xb1 went Jason Stone. The Twitter account was a massive promoter of what I have publicly called a Ponzi scheme before Olympus Dao. And so, yeah, it's hilarious to read this lawsuit where he repeatedly accuses Celsius Network of being a Ponzi. Well, he was actively using customer deposits from Celsius to invest in ponzis It's it's absurd.

00:10:13:06 - 00:10:28:01
Bennett Tomlin
It's bad satire. It's. I made a handshake deal to do what sounds incredibly illegal for this. What looks like a criminal enterprise. And now they're not paying me, so I'm going to sue them in New York State. It's I don't know what it is.

00:10:28:09 - 00:10:51:24
Cas Piancey
Yeah. And to explain why Bennett feels so frustrated here, because I think I want to lay this down in the most layman of of layman terms is if you're party to the idea of a Ponzi scheme or an obvious fraud scam, something like that. And you're like, man, I made this deal and we were making money off this fraud in this scam.

00:10:51:27 - 00:11:08:13
Cas Piancey
And I made this deal with this other party about the money we were making on this fraud in this scam. And then that other party didn't pay me. It's kind of like calling the cops to be like, Hey, my drug dealer didn't give me good drugs. And it's like, Oh, do you think this is going to end well for you?

00:11:08:13 - 00:11:29:21
Cas Piancey
Like, do you think the cops are going to come and be like, Oh, we totally understand you got ripped off for those drugs you were attempting to illegally buy it? Like, no. Like, nobody's going to have any pity or sorrow for you and your circumstance. Now, again, I don't know the rules and regulations of this civil lawsuit and what's going to be presented by the end of all this, who knows?

00:11:29:29 - 00:11:53:10
Cas Piancey
But what I do see is basically a guy who's working in and supporting a bunch of Ponzi schemes. I mean, let's call it what it is. And then getting mad when the company that's providing him the funds to support those Ponzi schemes doesn't necessarily pay out the promised yield that they suggested. So like scammers getting scammed, I don't know.

00:11:53:13 - 00:12:03:07
Cas Piancey
Boo fucking who as far as I'm concerned. But you've done a deeper dove into some of the other interesting aspects of this. So so let's talk about some of these like NFT.

00:12:03:15 - 00:12:26:06
Bennett Tomlin
Let's talk about the NFTs. This isn't one of the most important details in the lawsuit, but it is one of the most intriguing to me. So right before he told Celsius that he was resigning. There's a couple of really weird things that happen. First, he says and this is like point 90 in the lawsuit, I think, sorry, 89.

00:12:27:12 - 00:12:59:11
Bennett Tomlin
He says that he had gotten pre-approval to buy a bunch of NFTs as part of his profit sharing agreement. And like, if you look on the blockchain on March six, which is three days before he gave notice on March 9th, you see a ton of NFTs go out of the 0xb1 wallet and go to the 0x50d wallet and will link a link this on the website and stuff for people who want to actually see these and a lot of NFT suddenly go out from this account.

00:12:59:11 - 00:13:22:26
Bennett Tomlin
He was controlling to Celsius. To this other one he controls supposedly as part of his profit sharing agreement which he claims Celsius isn't honoring. So I guess those NFTs were insufficient for his share of the profits. But right after this, in point 91, he makes a really interesting point, which is after Stone left Celsius KeyFi Celsius maintained access and control of the 0xb1 wallet.

00:13:23:04 - 00:13:53:07
Bennett Tomlin
Celsius CEO Alex Mashinsky used that control for his own personal benefit. In one example, Celsius, the CEO transferred valuable NFTs from the 0xb1 account to his wife's. Well, I was cryptically tweeting about this yesterday before we recorded this because I think I figured out if this allegation is true, which well, that it might be, you can easily find transactions that go to a note on one of Krissy's wallets, but none of these nfts are particularly valuable.

00:13:53:18 - 00:14:14:04
Bennett Tomlin
There's one from Badger Dao which Celsius lost a bunch of money, and there's another Badger. And then there's some, like, weird crown with a unicorn on it. None of those are particularly valuable. All of them are flagged as spam on etherscan. And so I am incredibly dubious that that would be the valuable NFT that are being discussed in this.

00:14:14:12 - 00:14:54:09
Bennett Tomlin
But a few days after Jason gave his notice, the 0xb1 wallet starts acquiring a bunch of NFT and then transferring them to a wallet that has since never been used. And this is the 0x37284 and it received five Beeple NFTs, many of them much more valuable three that they paid about 200,000 for another one they paid like 120,000 for sorry for they paid like 200,000 a piece for and when they paid like 100,000 for two copies of Into the Ether, one of a bull with shit all around it, another one of like an infected thing.

00:14:54:09 - 00:14:54:25
Bennett Tomlin
And so you get.

00:14:54:25 - 00:14:56:21
Cas Piancey
You get you infected Pikachu.

00:14:57:00 - 00:14:58:08
Bennett Tomlin
Yes, infected Pikachu.

00:14:58:11 - 00:15:04:29
Cas Piancey
I want to make sure PokeMon lovers hate this shit because. Yeah, fuck these. Fuck these people.

00:15:05:13 - 00:15:24:10
Bennett Tomlin
This section of the podcast is probably better on our YouTube channel than on our podcast feeds. But yeah, so these five Beeple NFTs were transferred from 0xb1 to this other wallet that has since never been used. And so my guess is, if that allegation is true, those five Beeple NFTs are the ones that are being discussed there.

00:15:24:14 - 00:15:47:17
Cas Piancey
Yeah. And I want to just I know this is not necessarily like finance related or defi related or or anything in terms of to the point of them getting in trouble. But what I what I do want to say is that Alex Mashinsky and his wife, Krissy Mashinsky, have been very, very, very, very active on social media in general.

00:15:47:18 - 00:16:18:25
Cas Piancey
And about a month ago, Alex disappeared when Celsius finally collapsed, Alex Mashinsky vanished from Twitter.com. And now Krissy Mashinsky is kind of holding the torch in saying it's all FUD. You know, just build. Who knows what she does, but cool. Meanwhile, Newt Goldstein, the real name of the the chief Chief Technology Officer or Chief Financial Officer, I think it's chief financial officer of Celsius.

00:16:18:25 - 00:16:51:10
Cas Piancey
He is also stopped tweeting completely and entirely. So these people who are very, very active on social media completely disappeared. And now I understand if you're in media, I understand if you, for instance, run a podcast or have a YouTube channel, why you need to maintain a very active presence on social media. I understand why someone like Ryan, like Ryan Cohen, the CEO of Chewy and GameStop and a host of other companies, why he's active to a degree on Twitter and stuff like that.

00:16:51:28 - 00:17:23:19
Cas Piancey
He also is vague, right? He's also not implicating himself in like fraud. He's just saying stupid, stupid, funny things or whatever. Like, I think these people have become targets, not just of regulators and law enforcement. And now everyone who they owe money to, but they've become targets of ridicule on social media because people like Alex Mashinky and Do Kwon and Su Zhu and Kyle Davis are all gone now.

00:17:23:20 - 00:17:51:21
Cas Piancey
Right? These are bankrupt entities and people. And these were the same people who were telling everyone to have fun staying poor. These are the same people saying on bank yourself. These are the same people telling you that this 17% yield on UST or CEL Token was absolutely for real and now they're gone. And I think it just you know, what it says to me, they spoke to a fucking lawyer is what it says to me.

00:17:51:27 - 00:17:52:23
Cas Piancey
Not much else.

00:17:53:00 - 00:18:02:12
Bennett Tomlin
Probably lots of them. Yeah, well, and it's funny that you mention the CEL Token, because that was another fun allegation in this lawsuit that named names.

00:18:02:17 - 00:18:32:21
Cas Piancey
And I want to point out before you get started here about CEL Token, we you and I have repeatedly on Twitter discussed how CEL Token like reflects Celsius network and people involved with Celsius or getting yield from Celsius or whatever would respond to us and say Celsius token is in no way related to Celsius network really like it's it doesn't even if it goes to zero it wouldn't matter for Celsius network this lawsuit says otherwise so go ahead and now please go into that.

00:18:32:22 - 00:18:59:13
Bennett Tomlin
Yeah and so it specifically alleges and names names it says that Connor Nolan head of coin deployment at Celsius, told Stone that Celsius had used 4500 Bitcoin with a value of about $90 million to purchase the Celsius token on the open market between February of 2020 and November of 2020 in order to inflate the price. Yeah. So let's just look at what the price did during that period.

00:18:59:13 - 00:19:20:27
Bennett Tomlin
It went from $0.17 all the way up to like $2. So that's that's a nice little ten bagger. The purpose of this was supposedly twofold. One, since you got a higher interest rate, if you took your payment in Celsius token by increasing the value of the Celsius token, they limited how much they had to give out to customers.

00:19:21:08 - 00:19:43:08
Bennett Tomlin
The other part is Krissy, Alex and the rest of the Celsius team have a lot of Celsius token and dirty bubble media who you mentioned, who we've had on before, has done some work in trying to document alleged sales of Celsius token by Alex and Krissy. And so by increasing the value of Celsius token, they were personally enriching themselves and making it easier for them to exit their position and profit from this.

00:19:43:08 - 00:20:13:26
Bennett Tomlin
And like, again, this is a lawsuit, these are allegations. But that one, if it's true, is just using customer deposits to pump your own token so that you can exit is bad. It's it's it's fraud. It's morally abhorrent. It's proof that our regulators have been overly inactive. It's a negative mark. And anyone who's been defending Celsius over the last couple of years (Adam Back) regardless.

00:20:13:28 - 00:20:38:17
Cas Piancey
I also want to state that I mentioned to you that as I was looking through this lawsuit, it truly sounds to me like there's a lot of co-mingling going on between this KeyFi entity and Celsius network. And like, there's, it's it's all the same money, guys. It's all the same money. Who cares? I need people to understand that isn't how business works.

00:20:38:17 - 00:20:59:27
Cas Piancey
That isn't how business works. You don't just co-mingle funds. I wouldn't just go, hey, so about Cas Coyne and Crypto Critics corner down. I know all the funds are over there. I just spun up a new entity called Cas Coin Dao. So it's a combination of kind of both. Maybe we can just combine all the funds and I can kind of control them.

00:21:00:13 - 00:21:03:12
Cas Piancey
That isn't how business works. It's not how business works to any.

00:21:03:18 - 00:21:04:05
Bennett Tomlin
Dani Sesta likes it though.

00:21:04:05 - 00:21:31:17
Cas Piancey
It though. Oh Dani says to loves everything that's a scam. So to Sifu they all these these guys all love everything that's a scam. If they long it, you should watch the fuck out. These people are scammers like I think what's becoming apparent with all of this is our previous episode, right? Our Contagion episode, where it's it's all of these bad actors are trying to scam these other bad actors.

00:21:31:25 - 00:21:55:01
Cas Piancey
And there's a movie called Dirty Rotten Scoundrels. It's from 1988. It's pretty silly, pretty stupid. And it stars Steve Martin and Michael Caine. And they're two scammers who are trying to out scam one another. And in the end, the woman they're trying to scam ends up scamming both of them. And I can't help but think of that movie.

00:21:55:01 - 00:22:14:28
Cas Piancey
I can't help but think of that in The Sting and be like, oh, so scammer one thinks they can scam scammer to scam or two things they can scam scammer one, two and three and one, two and three. Like everyone is scamming everybody and at the end someone is getting a big, big w like I don't know who yet.

00:22:15:05 - 00:22:52:11
Cas Piancey
I suspect SBF and CZ aren't doing too shabby right now, but all of this makes me think that none of these people have the customers intention. All of web three is spun as this big W for for the people, for retail, for all of us. Like it's it's it's a retail win I was you know, what I was doing as I was going through FTX Official YouTube the other day and I was watching their podcast that they do with their head of trading and she's saying like, yeah, I think a lot of the trading that we do is against retail and you're just like, I hope that's not true.

00:22:52:15 - 00:22:55:18
Cas Piancey
I hope that retail is not heavily invested in this.

00:22:55:18 - 00:22:57:21
Bennett Tomlin
FTX's YouTube or Alameda's?

00:22:57:29 - 00:22:59:21
Cas Piancey
FTX's FTX's official.

00:23:00:10 - 00:23:00:18
Bennett Tomlin
I mean.

00:23:01:02 - 00:23:04:01
Cas Piancey
She was the Alameda Research head of.

00:23:04:10 - 00:23:04:21
Bennett Tomlin
Ryan right?

00:23:04:21 - 00:23:07:21
Cas Piancey
Right? Right. No, it was Caroline Carroll.

00:23:07:25 - 00:23:08:15
Bennett Tomlin
Because Ryan's.

00:23:08:28 - 00:23:30:14
Cas Piancey
Caroline Ellison. It was Caroline Allison, head of trading at Alameda Research on the FTC's official website after its official podcast. Talking about defi summer talking about how like yeah I think a lot of these trades were against it was like she starts it off saying like, huh? Like I went into it thinking like, this is also stupid. Such a dumb scam.

00:23:30:14 - 00:23:49:23
Cas Piancey
Like first we're farming comp, then we're farming whatever. Like it seems so dumb and a scam and you're like, Yeah, it is a fucking scam. Like, I don't know, man, the whole thing has been very off putting. But I think that what this lawsuit gives to me, and hopefully I think you're in the same camp is me, is that we're seeing the fall.

00:23:49:23 - 00:24:10:07
Cas Piancey
This is the full collapse. Like I don't know how far it goes. I don't suspect I'm not saying bitcoin to zero. I'm not saying Ethereum to zero. We're not being insane. I'm saying we're seeing the scammers, the yield farmers, the lenders, the exchanges. Everyone's turning against each other because there is no yield. There's no fucking yield.

00:24:10:07 - 00:24:28:25
Cas Piancey
Guys, it's clear to me this is this is the end game right here. Go to your local government. Seek out a court order against somebody in Defi. I'm so happy. This is where it ends. Is in a government structured court of law because of course it does well.

00:24:28:25 - 00:24:48:02
Bennett Tomlin
And he separated from Celsius in April of 2021 and has been trying to get paid since and launched this lawsuit after they shut down withdrawals and stuff because he's like, Oh, they're really not going to be able to pay now. Better make sure I make my claim public since the documentation for it is going to be lacking when the bankruptcy lawyers get in there.

00:24:48:08 - 00:25:15:29
Bennett Tomlin
There's not going to be a lot of paperwork that proves I was doing what I say I was doing, and so I better get this on the record somewhere. It's really what it kind of feels like to me. And you're right that like cryptocurrency industry is deeply and she was and all of these entities are tied together in these absurd ways and via these lending agreements actually speaking about lending agreements, there's another part of this lawsuit which I think is going to end up overlooked by a lot of people that I thought was quite important.

00:25:16:16 - 00:25:38:16
Bennett Tomlin
So Celsius ended up with a pretty massive hole in their books because they were doing very shoddy accounting. They logged the liabilities that they were going to owe customers who wanted to get paid interest in dollars. And then crypto prices went up and they forgot to mark to market and they had been giving out a bunch of those crypto assets to this one guy to send in to random yield firms.

00:25:38:26 - 00:26:12:25
Bennett Tomlin
And so then when people tried to withdraw Celsius, had to go back and buy more Ethereum and stuff on the open market at a higher price than their customers deposited that in order to function during this period to make this work Celsius started taking loans well and they were taking loans before this too. Several of these appear to be based on point 80 in the lawsuit Cel Token collateralized loans where lenders agreed to give out loans against Celsius token to Celsius so that Celsius could cover a hole in their books caused by their own flawed accounting.

00:26:13:21 - 00:26:53:02
Bennett Tomlin
Now, this wasn't the only loan they ended up taking because the lawsuit also claims that the loan that Celsius ended up getting from tether was negotiated effectively as like a bailout as tether trying to find a way to keep Celsius solvent. You may remember tether being the lead investor in Celsius, a series, a equity round, which is very similar to allegations that came out around December 2020 about Babel finance in China is that they had started to leverage their customer deposits in order to make more money, that they ended up in a position where they were overcommitted and didn't have the liquidity to handle more withdrawals.

00:26:53:16 - 00:27:28:06
Bennett Tomlin
And so they were able to negotiate a bailout from tether under special loan terms that gave them enough time to be able to get through that. Since then, now, more recent times, Babel has also had to shut off withdrawals as has Celsius. This other one that got this loan from Tether. And so the behaviors of Babel allegedly and Celsius allegedly and the involvement of tether in both in allegedly very similar manners is just endlessly fascinating to me and really points to kind of the same kind of thing you're talking about.

00:27:28:06 - 00:27:51:08
Bennett Tomlin
This was deeply incestuous. Celsius is a lending platform and like lenders were taking their native token to lend them more things so they could keep functioning. And it's just a a lot of critics talk about how market cap and stuff and a lot of the money values in crypto aren't actually what they seem because the liquidity isn't really there in the numbers are artificially inflated.

00:27:51:16 - 00:28:18:00
Bennett Tomlin
And this is an example of how dangerous artificially inflated numbers become when people don't pause and wonder, what if this is artificially inflated? What if the liquidity leaves? What if the confidence is shaken? And so then lenders extend loans again, Cel Token and Cel Token starts to collapse and Celsius starts to collapse and three arrows capital runs out of liquidity because they decided to make a leveraged play into a staked ether derivative.

00:28:18:11 - 00:28:30:07
Bennett Tomlin
It's it's absurd. And it's stupid. And when it starts to go, you're right, it can kind of just unwind all at once and start to collapse. Hopefully, hopefully clearing out a lot of the assholes.

00:28:31:01 - 00:29:01:23
Cas Piancey
There's always more, though. It's just such a magnificently stupid point and beautiful point I want to say. But it's such a stupid point in that I want people to fully comprehend what Bennett is expressing here, and we have gone over this before. The leverage isn't even fully expressed. When you say like leverage, when people talk about leverage, they talk about being able to get 2 to 100 X leverage on a purchase of a dumb token or whatever at BitMEX.

00:29:01:23 - 00:29:21:18
Cas Piancey
Right. Like this. This is what people talk about when they talk about leverage. When we talk about leverage, we're not just talking about leverage. We're talking about the idea that you're both investing in a company and then like lending them money at the same time and then getting interest payments back. But you have equity in the company that you're getting interest payments back from.

00:29:21:18 - 00:29:47:28
Cas Piancey
Like it's all a confluence of bullshit and and it's gross. It's gross and it's always gross. It's very gross in finance because what we have here is a bunch of companies that are propping each other up repeatedly and like you said, the unwind isn't just like a gentle unwind of like a bunch of gross assets. And and that has its own issues and murkiness and problems.

00:29:47:28 - 00:30:13:25
Cas Piancey
But this is a quick, slick, fast, ridiculous unwind where everything depends on everything else. So as soon as three AC three, sorry, three arrows, capital goes under, Celsius is fucked and then Voyager is fucked. And then after taxes, lending billions of dollars out to everybody. And so CC is saying, oh, we can lend out money and and Justin Sun is now saying he can lend out billions of dollars to everyone.

00:30:14:05 - 00:30:39:20
Cas Piancey
Okay. I guess. I don't know. I guess I guess we'll find out. I guess we'll find out if these people can actually do it because they're saying it because they probably are going to need to at least take on hundreds of millions of dollars to sustain the collapsing system, much like the US government did in oh eight. They're going to try to do it privately and without taxpayers support and I and I wish them luck.

00:30:39:27 - 00:30:40:12
Cas Piancey
Good luck.

00:30:40:19 - 00:30:42:11
Bennett Tomlin
Jp Morgan in the 1920s.

00:30:42:17 - 00:30:42:27
Cas Piancey
Sure.

00:30:43:01 - 00:31:01:24
Bennett Tomlin
Well, it's exactly what you're saying. And then like even the stablecoins themselves often act as kind of a type of leverage. Right? Like Tether is partially backed by secured loans which are collateralized by Bitcoin. They extend tether denominated loans. So that entities like Celsius and Nexo can lend tethers out so they can be used to purchase more cryptocurrencies.

00:31:02:03 - 00:31:32:12
Bennett Tomlin
Tether itself is backed by bitcoin and then other stablecoins like Dai are entirely a credit based model where they're almost entirely used for that kind of levering up rate. You deposit your ether so you can get dai, you can buy more ether, so you can deposit in and get more dai and lever up that way and so there's many places where that leverage is embedded and you think with something like Dai, it's public, you've got time to get your collateral in, but then sometimes you don't like we saw with Celsius and we talked about this a little bit when dirty bubble media was on like their Dai position ended up in danger because their other

00:31:32:12 - 00:32:06:07
Bennett Tomlin
loans were being actively liquidated and they were having trouble getting enough liquidity to buy enough DAI to pay down the loan and avoid that position from getting liquidated. And so even loans that seem secure seem adequately collateralized can very quickly become inadequately collateralized and unsafe, especially if there's other people in the space who are extending loans against similar assets that have liquidation points at a similar level, one liquidates and pushes below the liquidation point of another, and you start to see the cascading liquidations and so fundamental early.

00:32:06:08 - 00:32:29:12
Bennett Tomlin
But I hope this massive leverage wash out in crypto does is it eliminates a lot of the actors who've been using that really irresponsibly and hopefully starts to shift the culture away from one that is so predisposed towards focusing just on trying to eke out every bit of manufactured money from the retail investors who you're trying to attract on your podcast.

00:32:29:12 - 00:32:44:06
Bennett Tomlin
Right? Like, like it's a bad world where FTX brings on the head trader of FTX is CEO's trading firm and they go, Yeah, we go against retail. We want to take money from retail. And like to be.

00:32:44:06 - 00:32:59:06
Cas Piancey
Clear, I don't think she even fully comprehended what she was saying when she said that, like the guy was just saying, like, who's doing this with you guys? And she's like, I'm not sure, but I think it's like retail and you're just like, so you're just scalping retail, you're just fucking scalping retail.

00:32:59:06 - 00:33:15:17
Bennett Tomlin
Well, it's what SBF said on Odd Lots right? We put the money in the box. Everyone else follows in and puts their money in the box. And then we take out our money and most of their money too, right? They tell you what they're doing. They're telling you exactly what they want to do to exploit you. And you can see that these are not honest actors.

00:33:15:17 - 00:33:33:04
Bennett Tomlin
These are not good actors. That's what the overwhelming amount of evidence about cryptocurrency actors has shown. That's not to say there aren't good actors. That's not to say that aren't good people in cryptocurrency, just that there's so many of these entities that are so absolutely mercenary and so absolutely focused on eking out every possible cent of profit.

00:33:33:04 - 00:33:47:16
Cas Piancey
Outside the scope of cryptocurrency. I want to be clear. This is a finance issue. This is a finance issue. This is a finance issue, Turner repeated over and over again. So people understand we aren't just strictly focused on this. We are focused on finance. This is not like this is a.

00:33:47:17 - 00:33:48:20
Bennett Tomlin
Traders get blown up, too.

00:33:48:20 - 00:34:11:10
Cas Piancey
But this is this is a greed. This is a greed issue. This is a never enough issue. This is this is outside the scope, far outside the scope of cryptocurrency. And we understand that. And we're not going to deny that. But our main point that we've been focused on for all of this time has been cryptocurrency. So I think it's like we know that this this exists outside of cryptocurrency.

00:34:11:10 - 00:34:38:24
Cas Piancey
We know that banks aren't the best entities in the world. You know, we know we know Social Security is weird and we like we understand all of that. We're not denying that. It's about where you can make dramatic change right now. So I we appreciate everybody saying that there are problems outside scope of of cryptocurrency and and contagion in regard to Celsius and these lending platforms and tether you're right we're not denying that.

00:34:38:24 - 00:35:04:19
Cas Piancey
But yeah, I am so happy to see the FDIC moving against Voyager or at least investigating them. I don't want to say moving against, but investigating Voyager. We have these bankruptcies, which is going to entail government looking into these companies and deciding what the hell is going on and whether it's okay. I'm actually more optimistic now than I was two or three years ago with the state of cryptocurrency.

00:35:05:00 - 00:35:29:12
Cas Piancey
I'm not I don't know how I honestly don't know how. You couldn't be like seeing these bad actors, not just blow themselves up, but get blown up by regulators, get taken down by regulators, get called out, get investigated. I am far more optimistic now than I have been pretty much ever covering this space. And we've been here for almost five years now.

00:35:29:12 - 00:35:30:25
Cas Piancey
Right. There's four or five years.

00:35:30:26 - 00:35:50:06
Bennett Tomlin
I mean, sure. We've talked a little bit recently about how we've seen a little bit more law enforcement regulator action, which is a promising development. And like I said earlier in this, I hope this kind of wash out removes some of the bad actors and some of the worse actors. And I think this has drawn a spotlight that it'll make it harder for crypto to get away with some of the things it's done in the past.

00:35:50:16 - 00:36:17:08
Bennett Tomlin
But I think also in the broader context, the US regulatory state is actively being gutted by the Supreme Court. There's a good chance that Congress will end up either so split that nothing will ever pass or Republican controlled with an anti-regulatory bent by the beginning of 2023. And there is still a non-zero percent chance we end up with someone like Trump back in the Oval Office in 2025 with an active goal of dismantling the regulatory state and putting in people who won't regulate.

00:36:17:17 - 00:36:37:29
Bennett Tomlin
That is not to mention that crypto has done a much better job now than it has at any point in the past of buying influence and getting into positions where there are powerful people advocating for cryptocurrency and effectively owned by the cryptocurrency ecosystem. And so, yes, right now, in the past few months, we've had several positive developments that started to give me hope.

00:36:38:06 - 00:36:51:04
Bennett Tomlin
Regulators seeming to become more active, the Department of Justice bringing down indictments. But the larger picture still seems to me to suggest that things are about to become worse, not better, when it comes to us covering cryptocurrency in the scams.

00:36:51:11 - 00:37:13:25
Cas Piancey
Well, I tried to end it on a good note and Bennett just fucking destroyed that. So there you go, everybody. Now you understand Bennett hates anything that is good and optimistic. That is the way it is. It's not just me. It is largely Bennett's fault. On that note, I think we're going to call that in episode. And guys, I am deeply down.

00:37:13:25 - 00:37:38:01
Cas Piancey
I fully invested in Celsius. And that was that was all of crypto critics, corners, reserves. That was how I was going to pay our producer and deal with everything. So if you all can support us by donating all of your CEL Token to the burn address, please don't listen to me. Hit the like unsubscribe button. It's far easier than anything else I'm saying or suggesting.

00:37:38:19 - 00:37:44:07
Cas Piancey
Thanks for listening, everyone. And we'll we'll talk to you, I guess, soon.

2 responses to “Episode 85 – Celsius Network: A Pyramid of Ponzis”

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