It has been a year since Celsius Network LLC filed for bankruptcy protection by the court. A year later a bad situation may be about to get worse as the Commodity Futures Trading Commission appears to be considering legal action against the company and its CEO. Celsius problems with the CFTC seem to be that the CFTC believes they broke rules relating to commodity trading. The CFTC will need to vote before a decision to take Celsius to court is final.
What Did Celsius Do Wrong?
Our question does not have to do with why the company filed for bankruptcy. Rather the question has to do with why the Commodity Futures Trading Commission is considering legal action. There are two issues. One is that Celsius did not register for trading with the CFTC. The other is that it misled its clients. In regard to registering, this will be an issue for the court to decide. Regulators have only recently started going after crypto exchanges and DeFi businesses. Crypto businesses can argue that they did not know that they needed to follow any given set of rules. The CFTC will probably respond that ignorance of the law is not a valid excuse. What still angers many crypto investors in the year after the worst of crypto winter is that crypto businesses hid information from their investors and customers. This issue will likely be easier for the court to decide.
Not the End of Legal Troubles for Celsius
While Celsius’ problems with the CFTC are coming to a head, two more sets of issues are still in the works. The SEC is investigating Celsius as are federal prosecutors in Manhattan where financial crimes are typically prosecuted. During the Covid-19 pandemic Celsius was very successful. They provided loans and took deposits. Their deposit rates were substantially higher than those seen in traditional finance. Their CEO repeatedly stated that their loans and deposits were as safe as any offered by traditional lenders and savings institutions like banks.
When the popular stablecoin, TerraUSD, collapsed, the contagion spread throughout crypto and included Celsius. Celsius had, like so many in the crypto world, bet on crypto going up forever. Thus they could offer what would otherwise be interest rates that would lose money believing that increasing crypto values would make up the difference. When things went from bad to worse Celsius denied any losses. When they experienced the crypto equivalent of a run on the bank they froze all assets. It was only a month later when they filed for bankruptcy protection.
How Many Companies Is the CFTC Suing?
If it seems like the CFTC and SEC are suing a lot of crypto businesses, it is because they are. According to Bloomberg’s article about the CFTC probe, the CFTC has filed more than 85 lawsuits. They involve manipulation and fraud in the digital-asset market and could lead to more than $4 billion in restitution and penalties. On the SEC page for crypto asset and cyber enforcement actions, they list over 140 separate cases. What we are seeing is a wholesale sorting out of crypto exchanges and decentralized finance businesses. As with Celsius, there are generally two issues. One is whether or not a business has registered with the appropriate authorities. The other is if companies have been forthright with their customers and investors. A third issue for exchanges like Coinbase is that they will likely have to break down their businesses and separate the parts. Rather than running a shop where trading, clearing house activities, broker dealer functions, and trading all occur under one roof they will have to be separated just like they are in commodity futures and stock markets.
Celsius Problems With the CFTC – SlideShare Version