The independent examiner in the bankruptcy case of cryptocurrency lender Celsius has alleged that the company failed to establish “sufficient” accounting and operational controls in its handling of client funds.
In an interim report published on November 19, Examiner Shoba Pillay made a number of dour remarks in her court-appointed investigation into the failing cryptocurrency lending platform.
One of the main revelations of the Pillay report was that Celsius’ Custody program was launched “without sufficient accounting and operational controls or technical infrastructure”, allowing deficits in Custodia’s wallets to be financed with its other holdings:
“[…] no effort was made to segregate or separately identify assets associated with Custody accounts, which were commingled across major wallets.”
When it launched on April 15, Celsius’ Custody program allowed users to transfer, exchange, and use coins as collateral for loans. It was introduced after the company was ordered by New Jersey security regulators to create a product that distinguished itself from the Celsius Earn product, which receives rewards.
This mix of wallets means there is now uncertainty about which assets belonged to the client at the time of the bankruptcy filing, Pillay said.and noted:
“As a result, clients now face uncertainty about what assets, if any, they owned at the time of the bankruptcy filing.”
The interim report has also shed light on what ultimately forced the lending platform to suspend withdrawals on June 12.
Pillay said the breaking point came on June 11, when Custody clients’ wallets ran out of funds.. By June 24, this figure was reduced a further 24% to reach USD 50.5 million in underfunding.
The reveal comes after A filing with the New York-based bankruptcy court last week stated that Celsius clients must file claims against Celsius by January 3, 2023, in order to be eligible for distributions in the case.
Nevertheless, Customers who agree with Celsius’s claim scheduling do not need to submit proof of claim, according to a November 20 post on Twitter from Celsius.
Pillay said that Celsius Custody and Withdrawal programs were created in the short term following “intense regulatory pressure” from the New Jersey Office of Securities, which launched an investigation into whether Celsius “Earn” accounts constituted securities under the laws of US values in mid-2021.
Other accounting weaknesses highlighted in the report include the disclosure that Celsius, founded in 2017 by Alex Mashinsky and Daniel Leon, didn’t start tracking its balance sheet until after this clash with regulators in May 2021, then using Google Sheets.
The collapse of the Terra ecosystem was one of the main factors that led to Celsius’s financial problems in May 2022, at which point its native coin, Luna Classic (LUNC), formerly LUNA, and the network’s algorithmic stablecoin Terra Classic USD, (USTC) – formerly TerraUSD (UST) – fell above 98% of their value.
Celsius too stated on November 20 that his next court date is scheduled for December 5, where he plans to advance discussions surrounding his Custody and Retention accounts, among other matters.
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