The ruling highlights the Wild West nature of the unregulated cryptocurrency industry. On Thursday, New York Attorney General Letitia James moved to impose some sort of injunction, or at least legal ramifications, against Celsius founder Alex Mashinsky, whom he accuses of defrauding hundreds of thousands of consumers.
Since Celsius was the first cryptocurrency platform to explode last year, Crypto’s fortunes have plummeted in recent months, with its bankruptcy in July freezing at least $4.2 billion for 600,000 Americans and foreshadowing the collapse of FTX four months later, according to court filings.
While Glenn’s decision won’t affect FTX, which has different terms of use, some analysts saw the decision as extending beyond Celsius.
“There are many other platforms that have terms of use similar to Celsius’,” said Aaron Kaplan, an attorney at the finance-focused firm of Gusrae Kaplan Nusbaum and co-founder of his own crypto company. Clients “need to understand the risks they are taking when placing their assets on insufficiently regulated platforms,” he said.
James’ lawsuit, meanwhile, alleged that Mashinski used “false and deceptive representations. [customers] investing billions of dollars in digital assets. The lawsuit seeks unspecified damages from Mashinski and seeks to bar him from several financial and other jobs in New York.
Celsius spokesman Luke Wolf said Mashinsky is no longer involved in the management of the company. Mashinski did not respond to a message seeking comment.
For years, Celsi has promised people extravagant interest rates in the neighborhood of 20 percent in a sort of fantasy version of a real-world bank, forcing many people who had no interest in crypto to enter the market.
The suit says Mashinski was the cause. “In hundreds of interviews, blog posts and live broadcasts,” he says, “Maszynski has presented Celsi as a safe alternative to banks while concealing the fact that it engages in truly risky investment strategies.”
Mashinski was regularly recognized online for his “Ask Mashinski Anything” Q&As and t-shirts with slogans such as “Banks are not your friends.” Hordes of fans on YouTube and Twitter hailed the cult of “The Machine” as he was nicknamed. If FTX’s Sam Bankman-Fried was the public face of cryptocurrency in the halls of Washington, Mashinsky was often its most prominent symbol to ordinary investors.
The suit painted a picture of a man intent on presenting himself as a hero to the unbanked and working class, when most of those people’s money was actually used to fund high-risk investments.
Mashinski, who described himself and his company as a modern-day Robin Hood, boasted that Selsey was giving ‘to people who would never make it…’ [and] we buy from the rich,” the suit states. “These promises were lies”
However, if crypto companies are savvy enough to protect themselves, there may be a limit to what the legal system can do, according to the bankruptcy court. Investors and a number of states joining their movement say the language is at least “ambiguous” in the rights it gives Celsius. But Glenn disagreed.
Celsius, Joshua Sussberg, and Patrick J. Nash Jr. and attorneys for the creditors, Gregory Pesce and Andrea Amulic, did not respond to requests for comment.
The bankruptcy ruling focused on whether Celsius could sell $18 million in so-called stablecoins, now a type of virtual currency, to help it stay solvent as part of the restructuring. But its effects are greater. Ruling that the money in the accounts did not actually belong to 600,000 account holders, the court essentially said they were now just unsecured creditors. And “there won’t be enough value to pay them off,” Glenn wrote.
The effects may even extend beyond their boundaries, affecting other cryptocurrencies with serious language in the fine print – presenting problems to customers in the event of a crash.
“It raises another question about how difficult it is to transact in the Wild West of cryptocurrency,” said Brian Marks, who teaches economics and business law at the University of New Haven’s Pompea College of Business and researched the Celsi situation. “I wouldn’t be surprised to see other companies reconsider their terms after this.”
The relationships between cryptocurrency firms are extensive, and the failure of one can spill over to another, even months later. On Thursday, cryptocurrency lender Genesis said it would lay off 30 percent of its employees, partly as a result of a loan to FTX sister firm Alameda Research.
Celsius creditors are also affected by the bankruptcy of FTX. Mashinsky’s former firm, a New York court, had loaned $1 billion to Alameda, which FTX secured with the FTT token.
“FTT’s value has fallen by about 95% since then,” he said, “making Celsius an almost worthless collateral.”