The CFTC has reportedly found evidence that the crypto lender and its former CEO violated its rules by deceiving customers about the risks and returns of its products.
According to a Bloomberg report, citing sources familiar with the matter, the Commodity Futures Trading Commission (CFTC) has concluded that Celsius Network and its former CEO, Alex Mashinsky broke the regulator’s rules by misleading investors about the nature and profitability of its crypto lending products.
The report said that the CFTC could file a case against them as soon as this month if a majority of its commissioners agree.
The CFTC is the federal agency that oversees the derivatives markets, including futures, options, and swaps. It also has jurisdiction over certain types of crypto products, such as Bitcoin futures and options.
The CFTC has been clamping down on crypto companies that offer unregistered securities or engage in fraud or manipulation.
The report did not specify the exact details of the alleged misconduct by Celsius and Mashinsky, but it suggested that they may have deceived customers about the risks and returns of their crypto-lending products.
Celsius offers interest-bearing accounts for crypto deposits, as well as loans against crypto collateral. It claims to have over 1.2 million users and over $30 billion in assets under management.
However, in January, an independent examiner appointed by U.S. courts found that Celsius operated in a manner similar to a Ponzi scheme at times by using new deposits to pay interest to existing customers rather than generating profits from lending activities.
The examiner also said that Celsius failed to disclose material information to investors, including the identity and creditworthiness of its borrowers, the liquidity and solvency of its platform, and the regulatory risks it faced.
The examiner’s report was part of a bankruptcy proceeding involving one of Celsius’ borrowers, Helbiz Inc., that defaulted on a $12 million loan from Celsius in 2020.
Helbiz claimed that Celsius breached its contract by liquidating its collateral without proper notice or consent.
In addition, Vermont’s financial regulator issued a cease-and-desist order against Celsius in September, accusing it of offering unregistered securities in the form of its interest-bearing accounts.
The regulator said that Celsius did not provide adequate disclosures or protections to its customers and violated state securities laws by soliciting. Vermont residents without being registered as a broker-dealer or investment adviser.
The Potential Consequences
If the CFTC decides to sue Celsius and Mashinsky, they could face civil penalties, injunctions, disgorgement of ill-gotten gains, and bans from participating in the derivatives markets.
The CFTC could also refer the case to the Department of Justice for criminal prosecution if it finds evidence of intentional or reckless misconduct.
The CFTC’s action could also have wider implications for the rapidly expanding crypto lending industry. Crypto lenders offer attractive interest rates to crypto holders seeking passive income or leverage.
Still, they also pose significant risks and challenges in terms of regulation, compliance, security, and transparency. The CFTC’s case against crypto lenders could signal that the regulator is taking a more aggressive stance and expects them to comply with its rules and regulations.
This could force crypto lenders to register with the CFTC or seek exemptions from its oversight, or exit the U.S. market altogether.
Neither Celsius nor Mashinsky has commented on the Bloomberg report. An email to Celsius’ press inbox went unanswered.
The CFTC did not immediately respond to CoinDesk’s request for comment.
