Alan Knitowski has a MBA and has been working in the finance and technology sectors for more than 25 years. He is also the CEO of a NasdaqMobile company that is listed Despite his expertise, he still was tricked by a crypto lender.
Knitowski provided $375,000 in loan terms to Celsius and deposited $1.5 Million in Bitcoins as collateral. He liked bitcoin as an investment and didn’t want it to be sold and believed the price would rise.
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That is the model Celsius used. Investors could exchange their cryptocurrency holdings for a dollar loan. Knitowski would receive the bitcoin back after he had paid off the loan.
But that is not how it happened. Celsius declared bankruptcy in July after an industry-wide liquidity crisis triggered by a fall in cryptocurrency prices. Records show that there were thousands of creditors with more than $812,000,000 in escrow on the platform and borrowers were not able to return collateral even after they had paid off their loans.
“Every aspect of what they did was wrong,” said Knitowski, who runs an Austin, Texas-based company called Phunware, in an interview. “If I or my CFO did anything like this, we would be charged immediately.”
Creditors are now going through bankruptcy to try and recover some of their funds. They were encouraged to be optimistic Friday, after Celsius GK8 announced that it will be selling its asset custody platform, GK8, to Galaxy Digital.
David Adler, who works with McCarter & Associates, a firm that provides bankruptcy advice, and represents Celsius’s creditors, said that the proceeds of the transaction should be used for legal fees. In addition, there could be funds available to former clients.
“The big question is: who is entitled to the money they get from GK8?” Adler told CNBC. According to him, he represents a group consisting of 75 borrowers that have around $100 million in digital assets on the Celsius platform.
Later this month, bidding for the auction could bring more relief to customers. They would have the option to repay the loans and release collateral if another company purchases them.
 is a consumer protection measure which requires lenders to provide borrowers with critical information, such as the annual percentage rate (APR), the term of the loan, and the total cost to the borrower. The email sent to borrowers mentioned that the required disclosures under TILA were missing.
Jefferson Nunn, a contributor and publisher of Crypto.news, borrowed money from Celsius and put more than $8,000 in bitcoins as collateral. However, these assets are not his even if the loan is repaid. After seeing an advertisement for the platform, he said that he received a loan to buy more bitcoin.
Alex Mashinsky, the former CEO of Celsius, made similar comments shortly before the withdrawals were stopped. He said that the funds are safe from the borrower. However, Nunn said that his funds are still locked up in the platform.
The inadequacy of disclosure has been a frequent topic in the crypto industry. Sam Bankman-Fried, the CEO and founder of the exchange FTX, recently faced a liquidity crisis. He had to look for a rescue package after informing his followers about the flaw on Twitter.
The implosion of Celsius may not be as severe as that of FTX, which was recently valued at $32 billion. However, its management has received criticism as, according to court filings, top executives took millions in assets from clients before the company halted client withdrawals.
An ex-employee, who did not want to be identified, claimed that the lack of financial oversight led to substantial holes in the company’s balance sheet. The biggest problem was that the assets and liabilities of the company did not match. The employee also said that Celsius was borrowing client deposits to risk platform lenders, and did not have enough liquidity to repay the funds.
The former employee also said that crypto assets were first deposited by customers for them to be able to withdraw their funds. Celsius would then rush to buy assets from the open market, often at a premium. He added that the lack of prudence with client funds and the risky bets in order to keep generating high returns promised to depositors were a tremendous error in judgment.
Many people trusted Alex Mashinsky, the former CEO of Celsius, and are now unable to pay medical bills, mortgages, and other expenses. Multiple requests for comment have been ignored, and Mashinsky declined to comment on the matter.
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