Chainalysis Sued For Deception In Celsius Scam

Celsius Network LLC was a cryptocurrency platform that promised customers up to 18% yield on deposits, marketing its native CEL coin. The platform imploded in the cryptocurrency liquidity squeeze of 2022, revealing a massive ponzi scheme in which Celsius founders were artificially inflating the price of CEL while dumping their personal holdings on the platform's customers.

Celsius Network has since been taken over by debtors appointed by New York's bankruptcy court, tasked with recovering customer and investor funds. The debtors, led by Van Eck Absolute Return Advisers Corp., a subsidiary of the investment firm Van Eck Associates, are now suing the blockchain surveillance firm Chainalysis for helping Celsius prop up the value of its platform to mislead customers and investors.

"This adversary proceeding is about how Chainalysis knowingly and willfully fueled one of the biggest cons in cryptocurrency history, deceiving customers, propping up a sham company, and accelerating Celsius’s catastrophic collapse," the complaint states.

At the center of the lawsuit stands an audit of Celsius' Assets Under Management (AUM), for which the platform cooperated with Chainalysis. According to the audit, the platform had $3.3 Billion under management – Billions off from what the platform actually had in assets.

Rather than just alleging that Chainalysis' audit was inadequate, the plaintiffs claim that Chainalysis was effectively in on the scam. As the complaint states: "Chainalysis, a supposed authority in blockchain analytics, knew the truth but willingly lent its credibility to the Insiders’ lies—misleading both the public and Celsius."

To make their point, Celsius chronicles how the platform's fraudulent AUM was calculated based on public and internal information.

Celsius founder Alex Mashinsky, who plead guilty to commodity and securities fraud in December 2022 forfeiting $48 Million in ill-gotten gains, requested access to Chainalysis' analytics tools in 2020. "Over the next weeks and months," the complaint alleges, Chainalysis "proceeded to work closely with Mashinsky and others to publicize a massive—and fraudulent—AUM figure."

According to the complaint, Celsius head of AML first used the software to calculate an AUM of $1.177 Billion. Days later, Chainalysis co-founder Jonathan Levin appeared in a promotional video together with Mashinsky on Celsius' YouTube channel, touting Chainalysis' abilities to analyze data and enhance transparency in the crypto space.

But in the video, Mashinsky claims that Celsius had $1.6 Billion in assets under management – over $400 Million more than the first internal audit had found. Rather than correcting Mashinsky, Levin acknowledged the statement, the complaint alleges.

The next day, Celsius calculated a new AUM, finding $2 Billion under management. Sharing the methodologies and underlying data used for the calculations, Chainalysis stated in an email to Celsius that it found the use of its software "accurate". "We can stand behind how [Celsius] used Reactor in [their] work," the complaint cites.

A week later, Mashinsky instructed Celsius' head of AML to include the value of the platform's native CEL token in the AUM, increasing the calculation by another $1.3 Billion.

This fraudulent figure, totaling $3.3 Billion, was then publicized in a joint press release, which Chainalysis drafted with Celsius. Together, the complaint alleges, the firms announced "the completion of an audit confirming $3,318,368,196.40 of assets by Chainalysis," claiming that the audit was based on "transactions, total deposits and total withdrawals since launch of the service in June 2018."

But Chainalysis "knew that the process involved more than a simple counting of 'total deposits and total withdrawals,'" as the AUM was actually inflated by the inclusion of Celsius' CEL holdings, the complaint alleges, and could hardly be defined as a "thid-party audit", as the AUM was actually calculated based on a scheme designed by Mashinsky.

According to the complaint, Chainalysis admitted that it knew the press release was deceptive and misleading in an email to Celsius dated February 2021.

While customer registrations for Celsius were booming since the AUM's publication, Chainalysis was receiving inquiries about "doing other audits." This “raised a lot of questions that we needed to answer,” the complaint cites Chainalysis, because it made “it seem like we [Chainalysis] conducted the audit.”

Using Mashinsky's fraudulent calculation scheme, Celsius went on to claim $5.3 Billion AUM in January, $10 Billion AUM in March, and $20 Billion AUM in November. " Chainalysis still failed to correct or update the misstatements," the complaint states. "Instead, it sat idly by and enjoyed the additional publicity."

The announcement of Celsius' audit made its CEL coin skyrocket, jumping from $2 in November 2020 to over $8 in June 2021. But instead of legitimate market purchases, the close to only entity trading CEL was Celsius itself, with Celsius founders using customer funds to offloaded their personal token holdings onto the Celsius platform.

The press release, according to the complaint, "was the jet fuel that the Insiders’ fraud needed."

Both Mashinsky's scheme to mislead customers about Celsius' profitability, as well as Mashinsky's illicit manipulation of CEL's price, "were made possible with Chainalysis assistance in the public announcement of the purported 'audit,'" the press release alleges, helping the platform to portray itself as "a safe and secure institution," alleging that the relationship between the two firms was mutually beneficial.

On the one hand, Celsius insiders relied on the credibility conferred by Chainalysis’ stamp of approval to lend legitimacy to its fraudulent AUM audit, "just as Chainalysis needed the prestige of aligning itself with one of the most well-known crypto lending platforms at the time to bolster its credibility and expand its client base," the complaint states.

"Partnering with Celsius – one of the most prominent and well-known cryptocurrency lending platforms at the time – helped Chainalysis solidify its position in the industry as a market leader and go-to partner for all things blockchain related," the complaint states.

While "Chainalysis marketed itself as the gold standard in the crypto industry in terms of credibility as a blockchain examiner," the complaint alleges that "Celsius’s large AUM made the relationship more impressive and important to Chainalysis."

Celsius is now suing Chainalysis on a total of sixteen counts, including aiding and abetting breach of fiduciary duty, engaging in false advertising, as well as violating consumer protection and deceptive practices laws.

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