KeyFi, a former asset manager for Celsius, has sued the troubled crypto lending firm, alleging that it was not paid for its work and that Celsius mismanaged customer funds.
The lawsuit is the latest twist in the saga of Celsius, which has halted withdrawals and transfers after a liquidity crisis and its exposure to volatile crypto assets such as Terra's UST and staked ether, or stETH.
KeyFi managed roughly $2 billion in customer assets for Celsius via the popular but previously anonymous 0xb1 crypto address from August 2020 to March 2021, according to the lawsuit and tweets from KeyFi CEO Jason Stone.
The lawsuit filed in New York state court says that Celsius assured KeyFi that it was monitoring and hedging KeyFi's investments to guard against impairment, including impermanent loss, a type of loss that can happen when crypto is held in liquidity pools.
However, KeyFi discovered in February 2021 that Celsius was not hedging at all, the lawsuit states, and KeyFi subsequently sought to end its work for Celsius.
The co-founders of Celsius, Alex Mashinsky and Nuke Goldstein, already knew Stone before partnering with KeyFi because the co-founders had previously invested "tens of thousands of dollars" into KeyFi, the lawsuit states.
The original agreement for KeyFi to invest was a handshake deal in August 2020, after which Celsius created the 0xb1 address, transferred hundreds of millions of dollars to it and gave KeyFi access, the complaint states. (They later signed a memorandum of understanding regarding intellectual property.)
The lawsuit states: "Despite the incredible value of the transferred assets and the parties’ intent to share profits on the transferred assets, there was no formal written agreement between the parties. Rather, Celsius continued to transfer hundreds of millions of dollars to Stone, which Stone and his team continued to invest, all on a handshake agreement that the parties would deal with each other honestly and squarely and settle up who owed what to whom at some later date."
The lawsuit also alleges that Celsius used its customers' bitcoin to purchase Celsius' own CEL tokens to artificially inflate the price of the tokens, which insiders and founders owned. Celsius also used the CEL tokens as interest payments for customer deposits instead of other liquid tokens or currencies. The lawsuit also alleges accounting errors that left large holes in Celsius' balance sheet.
KeyFi also alleges in the lawsuit that Celsius is a Ponzi scheme and is now insolvent because it has to keep bringing in new capital to pay out interest. It states that Celsius borrowed $1 billion from Tether — which was reported by Bloomberg last year — at a 5% to 6% interest rate but paid customers much higher rates for USDT and similar tokens.