Crypto lender Celsius is facing accusations of poor record-keeping in its corporate structure and a court battle between its customers and Series B investors. The firm has sought to merge its U.K. and U.S. entities, but court filings allege that the distinction between the two was a “sham.”
In 2021, the company established a Limited Liability Company in Delaware and attempted to transfer assets through a series of financial transactions. However, this resulted in “intercompany chaos” and “sorely lacking” internal records, making it difficult to disentangle each entity’s affairs.
While regular customers were misled by management and didn’t understand the implications of this transfer, more sophisticated Series B investors were well aware of deficient record keeping. The filing argued that the two entities should be treated as one for bankruptcy purposes, a claim supported by parallel filings from a committee of Celsius’ creditors, who alleged that the reorganization was a “sham” and a “façade.” They argued that the billions of dollars transferred between the two entities were fraudulent, implying that they should be disregarded by the New York court that is attempting to restore funds to creditors.
This situation is not unique to Celsius, as FTX faced similar accusations. Attorneys described the bankrupt crypto exchange as a “digital Potemkin village” whose slick front end disguised a messy and ill-governed reality. In a March 9 opinion, Judge Martin Glenn found that customers only had claims against the Delaware LLC entity, increasing the chances that Series B preferred equity holders could recoup some of their investment, which would normally be downgraded under bankruptcy law.
The allegations against Celsius highlight the importance of proper record-keeping and transparency in corporate structures. Poor governance can lead to confusion, chaos, and legal disputes that harm investors, customers, and creditors. The complex and opaque nature of the cryptocurrency industry only exacerbates these issues, making it essential for companies to prioritize good governance practices. As the cryptocurrency market continues to grow and evolve, regulators and investors alike must demand more transparency and accountability from industry players.