‘Gross Negligence and Foolish Behavior’: Their Crypto ‘Bank’ Failed and They Lost Six Figures Overnight – What Now?
Yaёl Bizouati-Kennedy
Sun, August 21, 2022
hocus-focus / Getty Images
On Sunday, June 12, at 10:20 p.m., George — like thousands of other customers using crypto lending exchange Celsius — received an email reading: “Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, Swap and transfers between accounts.”
“I knew they had exposure but never thought they would lock up our assets,” George, who wished to publicly divulge only his first name for reasons of privacy, told GOBankingRates.
George was shocked at first, but within minutes he went to Voyager, another platform he was using, and converted his assets there to cash.
“Then on Monday, Voyager limited their withdrawals,” he said.
George, a 58-year-old consultant, used to do business with six different crypto platforms but went on to keep only Celsius, Voyager and BlockFi. “I hit the trifecta,” he said. “I thought I was diversifying — if one gets hit, I have the other two. But no. It’s insane. I picked the three worst platforms. I have to laugh about it.”
He now has $22,000 in frozen assets and says that his family has been on an “emotional roller coaster” over the past few months.
“I wish I would have pressed the platforms more on the transparency of who they were dealing with. They would have never revealed that, and I should have said, ‘Well, I’ll go somewhere else.’ Greed kept me there.”
Voyager Digital, Celsius Crash After Three Arrows Capital Collapse
Crypto lending platforms Voyager Digital and Celsius promised eye-popping yields to their customers — that is, until they both filed for bankruptcy in early July due to their exposure to the now infamous Three Arrows Capital. Three Arrows Capital went bankrupt after the implosion of Terra LUNA and its TerraUSD (UST) stablecoin.
“My problem is that I transferred all my wallet into cefi [centralized finance] platforms right at the beginning of the pandemic to get yield, a dividend, an extra kick,” George explained. “I went in when the timing was right… summer 2020.”
“Stablecoins were paying 10% interest (USDC, Tether) and when you compare that to banks, it was a no brainer.”
George explained that Celsius paid interest every Monday, sending an email to customers letting them know how much they made.
“It was a dopamine hit. You feel it’s safe. They had $18 billion in assets under management at one point. Alex Mashinsky did an AMA every Friday live and I met him twice at conferences,” he said.
As of August 5, his family is still in limbo.
“We hear very little from Celsius. As for Voyager, they had offers, one from FTX, but their lawyers pushed back and want to keep exploring options, they want to go through bankruptcy. Now it’s just time, we have to wait. And how much will we get back? Fifty cents back on the dollar? Ten?”
As GOBankingRates spoke to other affected customers, the recurring theme among the answers was the initial trust customers placed in Celsius and its CEO Alex Mashinsky, as well as the ensuing anger they felt from having that trust abused.
Jovany Lopez, a 40-year-old full-time investor, said he had heard some rumors about Celsius having issues. Lopez now has more than $120,000 frozen on the platform — assets that were intended for “savings and investing for the future.”
“And I talked about moving all of my crypto out of Celsius, but then I decided not to. Then, within a week, Celsius stopped withdrawals. I was so angry at myself for not following my gut feeling a week prior,” he shared.
Alice Huang Wijaya, a 31-year-old multimedia journalist who has $11,000 in frozen assets, tells a similar story. She feels “shock, anger with a dash of hope that it will be fine.”
She had started hearing rumors circulating on trader groups, she said. “I was about to pull out, but just two days before freezing, Mashinsky said on Twitter everything was fine and I trusted him!”
YouTuber, podcaster, crypto enthusiast, and creator of BitBoyCrypto.com Ben Armstrong — aka BitBoy Crypto — told GOBankingRates he lost more than $3 million.
“I fully blame Alex Mashinsky for gross negligence and foolish behavior with other people’s assets and trust,” he said. “Celsius stole over 1,000 Ethereum and 100 Bitcoin and other cryptos that added up over $3 million. Those funds were part of my business war chest to pay employees and make investments during the bear market.”
Although he learned the news at the same time as other clients, he had actually received correspondence from a Celsius rep just days before withdrawals were paused. At that time, Armstrong was reassured that his funds were safe.
He thinks all the money in Celsius “is gone forever and it will take years for crypto lenders to rebuild trust,” However, he hasn’t lost faith in the space, saying that, “Crypto is an emerging market that involves considerable risk, but the upside is even higher.”
Investors Feel Anger, Some Shame After Crypto Losses — But Many Still Bullish
Compounding these stories of disastrous investment, several people GOBankingRates spoke to had recommended the platforms to members of their families or friends. Dragging their loved ones into such a financial fiasco added to common sentiments of anger and for some, guilt.
George, who says he still is a big believer in crypto, had recommended all three platforms to his brother-in-law, which he says is the part that bugs him the most. “It’s painful,” he said.
George’s brother-in-law, Jorge — a 65-year-old former civil engineer who retired in April — lost $270,000. Jorge’s lost funds had been set aside partially for retirement, “but mainly to diversify my investments with the hope of making profits and later on to invest in real estate, with those winnings.”
Although he says he initially felt “angry and disillusioned,” Jorge still thinks that crypto is “a better alternative than government printed money. Crypto will be in the future, a more stable currency. I just don’t know when that future will be.”
Jorge regrets, however, placing some of his funds in USDC interest accounts. “I should have known better… that an 8% to 10% interest [rate] was unsustainable,” he said.
Lopez, the 40-year-old investor, echoes that sentiment, saying that he is still bullish on crypto for the long-term and doesn’t have “any bad feelings about it,” as he still believes in the fundamentals, especially those around Bitcoin. “The exchanges got overleveraged and greedy,” he said.
“I am not even that angry about losing $120K,” he said. “I am more disappointed and angry for the people and family who trusted Celsius. I know I can replace the money I lost but my heart breaks for the others. Celsius should pay everyone 100% back, but it’s clear they are trying to save themselves versus the customers who trusted them.”
He says he blames himself for trusting Celsius and breaking the No. 1 rule in crypto: “Not your keys, not your crypto.” He now recommends taking cryptos out of exchanges and putting them in a hot or cold wallet.
Locked Crypto Assets and Losses Leading to Bankruptcy For Some Investors
Similar stories of loss and pain are flooding the Southern District of New York, where bankruptcy proceedings are already happening. Letters included in the court proceedings show customers pleading for a way to get their money back.
For example, 72-year-old Lindsey Derence told the judge in a letter to the court that she’s at risk of losing much of her life savings. “It took me four years of buying BTC and ETH in small increments to accrue to 1 Bitcoin, 7ETH that are now locked on Celsius. I planned to hold these assets in a safe crypto ‘bank’ and wait for them to increase in value so I could pay off my mortgage. Only without a mortgage payment will I be able to exist on just social security,” she wrote.
“When I tried to move my cryptos into a custody account, I was locked out by Celsius. That shows his fraudulent intent prior to bankruptcy. Since that moment, I’ve been in a state of fear, depression, anxiety, helplessness at the prospect of losing this much of my life savings. Small depositors must be made whole again,” she penned.
Several experts said that because the crypto industry is in its infancy, it makes getting funds back more complicated in the event of a hack or the collapse of a project.
Experts Suggest Industry Reform Needed to Protect Crypto Investors
Ari Redbord, a former senior advisor for the U.S. Treasury Department and now head of legal and government affairs at TRM Labs, told GOBankingRates that with the recent collapse of stablecoin project Terra, there is little that can be done.
“Civil lawsuits are expensive and take time and there is no FDIC-style insurance the way there would be for a bank. This is why global regulators and the crypto industry have supported proposals that call for reserve requirements for these types of projects,” he said.
“One interesting answer came recently from the U.K.’s HM Treasury which, last month, released a consultation which recommends changing existing legislation to give the Bank of England power to appoint administrators to oversee insolvency arrangements with failed stablecoin issuers. The BOE would be able to either prioritize making consumers and investors whole or mitigating systemic risk of being a ‘too big to fail’ scenario,” he shared.
Jay Fraser, director Of strategic partnerships at blockchain-enabled securities exchange BSTX, agrees, noting the parallel with the Mt. Gox situation in 2014.
“People who lost their money due to the exchange being hacked still haven’t gotten it back. There are no laws governing crypto assets like there are with money held in a bank. Crypto funds essentially belong to the crypto exchange, not to you, so without regulation, there’s a high chance that account holders won’t be getting their money back,” Fraser said. He added that, ultimately, the likelihood of recovery is based on how much underlying collateral the company still has.
“With so much of the industry-wide collapse driven by the Three Arrows defaults, how much money customers get back will depend on how much money can be recovered from Three Arrows. So far, that’s only been $40 million of about $3 billion in loans. This experience, as painful a lesson as it is, could be a positive for the long-term adoption of crypto by institutional managers,” he said. “With more guardrails and regulation that closely mirrors traditional finance, risk managers could allow more exploration of crypto assets for institutional portfolios.”
As for George, he is drawing lessons from his ordeal, saying, “You learn the hard way. When you lose the most, you learn the most.”
He adds that “crypto won’t go away,” but he will only keep Bitcoin and ETH going forward — he is saying no to more altcoins. He’s also changed his mind about what he intends to do when he retires — he now plans to help underserved communities improve their financial literacy.
GOBankingRates reached out to both Voyager and Celsius for comment but did not hear back by the time of publication.
