Celsius Lost $390M of Client Funds From ‘High-Risk’ Levered Trading: Arkham Report

The troubled crypto lending firm Celsius reportedly used its customers’ funds worth $534 million to execute “high-risk leveraged crypto trading strategies” through a third-party asset manager, a new report by blockchain analytics firm Arkham Intelligence says.

The report, which uses on-chain analytics, also indicates that these strategies “resulted in apparent losses of $390 million when the asset manager returned capital,” corresponding to $210 million at current prices.

Those crypto assets, as the report suggests, may be part of Celsius’ liabilities to customers.

Arkham said it had identified the asset manager as the team behind the investment firm KeyFi, led by CEO Jason Stone, one of the individuals associated with yield farming account 0xb1.

Yesterday, 0xb1 also confirmed his identity in a Twitter thread announcing a lawsuit that he launched against the lending firm.

According to Arkham, from August 2020 through April 2021, Celsius sent 0xb1 $534 million of crypto assets in 260 transactions ranging in size from $1,000 to $28 million. 0xb1, in turn, invested these funds in various DeFi yield-bearing activities, which included providing liquidity on decentralized exchanges (DEX), as well as lending and borrowing on Compound and Aave.

0xb1 also reportedly purchased a selection of NFTs worth $6.3 million, which included CryptoPunks, Beeple art, and several other projects.

The report cites a Chainalysis audit published in December 2020, which confirmed Celsius had $3.3 billion in assets under management.

By that date, the firm had already sent $365 million of funds to 0xb1.

“Assuming Chainalysis’ audit is correct, 0xb1 had over 10% of all Celsius’ assets under management in late 2020,” said Arkham, adding that in the five months following the audit Celsius sent 0xb1 another $180 million of their customers’ crypto assets.

Return at a loss

The report adds that 0xb1 appears to have returned $1.13 billion of crypto assets to the crypto lender between February and May 2021, which corresponds to a 111% profit if denominated in U.S. dollars.

Although this “may appear to be an exceptional return on Celsius’ $530 million investment,” Arkham noted that it is “not nearly as impressive when denominating 0xb1’s performance in the crypto assets it received from Celsius rather than in US dollars.”

The report points to the general performance of the crypto market, noting that the price of Bitcoin rallied from around $11,000 to around $60,000 over the examined period, posting gains of over 400%.

At the same time Ethereum, described as “another significant asset Celsius entrusted with 0xb1,” surged almost 900% from around $400 to nearly $4,000.

“More plainly, had Celsius held these assets instead of sending them to 0xb1, their value would have been $1.52 billion – close to $400 million more than what 0xb1 appears to have returned,” says the report.

Celsius’ dubious business model

Elaborating on Celsius’ decision to entrust corporate funds to a third party, Arkham says that the New York-based firm “possibly sent 0xb1 user-deposited assets that were accumulating interest.”

Per the report, “as a result of Celsius’ relationship with 0xb1, Celsius could have inadvertently ended up short of its customers’ deposited assets, let alone the interest it guaranteed them.”

Moreover, Arkham noted that the lender’s business model relied on “pocketing the spread between its returns and the interest it pays its users.”

“Thus, Celsius users’ account dashboards possibly informed them that they were accumulating crypto rewards that did not actually exist,” said the report.

Jason Stone didn’t immediately respond to Decrypt’s request for comment when contacted via Telegram.

Decrypt also reached out to Celsius, which returned an automated response saying that the firm was “working to respond to the many inquiries we receive as quickly as possible,” while also encouraging users to check out the company’s blog and official Twitter account.