NY Attorney General Alleges Celsius Founder of Defrauded Customers; Coinbase Fined $50M
In a one-two punch, New York state authorities slapped Coinbase with a $50M penalty on Wednesday, and sued former Celsius CEO Alex Mashinsky for allegedly defrauding investors on Thursday.
Mashinsky resigned as CEO after Celsius filed for bankruptcy last year. In a lawsuit filed Thursday, New York State Attorney General Letitia James accused Mashinsky of ripping off customers by promoting Celsius “as a safe alternative to banks while concealing that Celsius was actually engaged in risky investment strategies.”
Celsius famously offered customers interest as high as 17% on their crypto deposits. Mashinsky said that yield was made “by making low-risk collateralized loans to first-tier institutions and cryptocurrency exchanges as well as overcollateralized loans to retail borrowers,” the complaint notes.
But the company struggled to generate enough revenue to pay out the promised interest rates on customer deposits, and was forced into making riskier loans, alleges the lawsuit, which does not include Celsius as a respondent.
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“In search of revenue, Celsius moved into significantly riskier investments, extending hundreds of millions of dollars in uncollateralized loans, and investing hundreds of millions of dollars in unregulated decentralized finance platforms,” the lawsuit said. “As cryptocurrency markets plummeted in the spring of 2022, Celsius’s unsustainable business model began to unravel.”
$50M for Compliance
In a separate announcement Wednesday, the New York State Department of Financial Services said Coinbase, the largest centralized crypto exchange in the US, would pay a $50M fine for “significant failures in its compliance program.”
Coinbase also agreed to a $50M investment in its compliance program over the next two years. Its stock fell 4% on Thursday compared to a 0.84% decline in the Nasdaq.
“Coinbase treated customer onboarding requirements as a simple check-the-box exercise and failed to conduct appropriate due diligence,” DFS said in a news release.
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The case is a sobering development for Brian Armstrong, Coinbase’s CEO and founder. He made headlines in 2021 after criticizing the U.S. Securities and Exchange Commission for declining to meet with him to discuss crypto regulation. In December, he called on regulators to focus on CeFi companies and leave smart contract-based projects alone.
In a statement, Coinbase highlighted improvements it had made to its compliance system over the past two years.
“We view this resolution as a critical step in our commitment to continuous improvement, our engagement with key regulators, and our push for greater compliance in the crypto space – for ourselves and others,” it said.