Independent Bankruptcy Examiner Finds Major Problems with Celsius's Handling of Funds
In an interim bankruptcy court report made public November 19, 2022, independent examiner Shoba Pillay made several striking observations relative to the former operations of the now defunct Celsius Network. By virtue of this report we have learned that Celsius's 'Custody' program was rushed and was introduced in the absence of sufficient accounting and operational controls. This permitted shortfalls created in customer accounts to be funded from other Celsius holdings. See, e.g. Financial Express Digital Currency. Shoba Pillay states “insufficient” accounting and operational controls as reason behind Celsius’ mishandling of customer funds. (Accessed November 21, 2022)].
Citing the interim report, Cointelegraph found the above to be one of the main revelations therein, continuing:
[...] no effort was made to segregate or separately identify any assets associated with the Withhold accounts, which were commingled in the Main wallets.
[Lindrea, B. Celsius had ‘insufficient’ accounting and operational controls, says examiner. (Accessed November 21, 2022)]
Celsius' 'Custody' account was created April 15, 2022, and permitted users to swap, transfer, and utilize coins as and for loan collateral. This 'custody' program resulted from an order from New Jersey Security Regulators requiring Celsius to make a product that proved distinguishable from the already existing 'Earn' products.
The co-mingling of wallets has caused an uncertainty as to which assets belonged to the customers at the time of the bankruptcy filing, with the Examiner specifically noting:
As a result, customers now face uncertainty regarding which assets, if any, belonged to them as of the bankruptcy filing.
[Lindrea, supra].
It was noted by the Examiner that Celsius continued with its financial struggles throughout the month of May, 2022. It was posited by the Examiner that one of the key factors contributing to the struggles was the collapse of the Terra ecosystem.
The Examiners preliminary findings shed light on the ultimate push for Celsius to cease withdrawals on June 12, 2022. Pillay reported that Celsius' breaking point was reached actually on June 11, 2022. It was at this point that the customer's 'custody' wallets became underfunded. [See, e.g. Crawford, L. Examiner: Celsius' accounting and operational controls were 'insufficient'. (Accessed November 21, 2022)].
By June 24, 2022, the underfunding fell another 24% bringing the total insufficiency to $50.5 Million in underfunding.
And in unrelated but recent Celsius news, the Bankruptcy Court for the Southern District of New York, by Notice dated November 16, 2022, requires Celsius customers to file a claim by January 3, 2023 to be eligible to receive possible distributions from the case. [See, e.g. Handagama, S. US Court Approves Deadline for Celsius Customers to File Proofs of Claim. (Accessed November 21, 2022)].
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Regarding this notice, Celsius tweeted the following on November 20, 2022:
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