Founder of crypto lender Celsius Network arrested, charged with fraud

https://www.reuters.com/markets/us-sec-sues-celsius-network-its-founder-2023-07-13/

by caust1c • 3 years ago

478 339 3 years ago

"Somebody is lying. Either the bank is lying or Celsius is lying.” - Alex Mashinsky

EDIT: omg at the almost $5B settlement

https://www.cnbc.com/2023/07/13/former-celsius-ceo-arrested-... ("The FTC also announced a $4.7 billion settlement against the exchange, which will not be paid until creditors and investors have been repaid in bankruptcy proceedings.")

jbverschoor• 3 years ago

Why not both?

namirez• 3 years ago

Because it’s an “or” rather than an “xor”.

TheAlchemist2• 3 years ago

All those guys are going to end up in prison. It’s fraud after fraud - biggest one being Tether.

It’s just impressive how long it all takes.

realusername2• 3 years ago

I'm also surprised Tether hasn't imploded yet, it's opacity must have saved it in the short term

legitster10• 3 years ago

The FTC determined that the exchange is guilty of defrauding investors because Celsius defrauded customers.

And the remediation is that investors get their money back.

Kind of weird when you think about it. But it's a good reminder that the goal of the FTC is to protect investors.

seanhunter2• 3 years ago

I think you mean the SEC. That’s the agency here and yes, investor protection is part of the SEC’s mandate.

Outright0133• 3 years ago

Just oligarchy things.

ivalm• 3 years ago

Celsius is not a bank, the customers were junior creditors. Junior creditors get paid after senior creditors. People should not deposit their money in not banks if they want guarantees on their deposits.

jowea3• 3 years ago

I'm not up on all the details of the situation, but "after creditors and investors" means $0, right? Why is a fine getting less priority than investors? Isn't that a moral hazard?

toomuchtodo2• 3 years ago

Fine is less priority than investors because the government doesn't want to be taking recourse from those harmed.

jqpabc123• 3 years ago

Crypto is a fraudster's paradise.

chx• 3 years ago

Deleted. Read https://ic.unicamp.br/~stolfi/bitcoin/2020-12-31-bitcoin-pon... https://www.ic.unicamp.br/~stolfi/bitcoin/2021-01-16-yes-pon... instead.

icepat• 3 years ago

If you rolled back every bitcoin transaction ever made you would end up with people in debt because the transaction fees were paid.

This can be said about every bank transaction that charges a fee as well. Not a crypto fan at all (I find it rather silly overall), however this is not a particularly strong angle to attack it from.

shagymoe3• 3 years ago

As noted by another poster, all transactions cost someone something on every monetary network. You're also completely ignoring all the benefits miners provide by securing the network etc...

Celcius, FTX, et al the many thousands of shitcoins are all scams or pyramid schemes without merit. Bitcoin, despite that fact that early adopters profit greatly, has many benefits to individuals and society as a whole but many people have simply closed themselves off to the possibility because they're unwilling, for mostly selfish reasons, to even consider the benefits.

zarzavat• 3 years ago

What global money transmission method doesn’t have transaction fees? Can you name one?

wpietri20• 3 years ago

And unfortunately I think the tech industry unintentionally enabled it in a few ways.

The internet/mobile boom was a real leap for humanity. (Not an unmixed one, any more than the printing press was. But a real leap nonetheless.) This left a lot investors looking for the Next Big Thing. I think it made regulators very cautious of possibly harming something that could be The Future. Journalists were accustomed to telling uncritical gee-whiz and great-man stories about tech. And we ended up with a cultural archetype of the genius tech founder in the Steve Jobs/Tony Stark mold.

All of these things were vigorously exploited by the cryptocurrency fraudsters and blockchain grifters. That harmed all the people they suckered, of course. But I also think it was terrible for the tech industry. The culture flowed back into tech, and also created an incentive toward hype. All the years and all the money spent on the mining/blockchain/smart contract/ICO/DAO/NFT/DeFi/Web3 series of bullshit "innovations" could have gone to real technology and real companies. All the bright young people distracted by that stuff who instead of learning the fundamentals of real business and real tech who will have to spend years deprogramming themselves.

Hopefully next time around we can be more discerning, more usefully critical.

tmpz22• 3 years ago

But how much does our industry get to claim unintentional?

Were we incompetent? Naive? Uninformed? Blinded by good intentions, optimism, greed?

If celebrities who endorsed ftx are now in hot water - should tech influencers such as major VC firms also be held liable?

duckhelmet• 3 years ago

It's understandable why these were modded into invisibility ;) --

@nancyhn: “The banking industry is a fraudster's paradise. The difference is they don't get arrested, they get bailed out with bonuses. It seems there are a lot of short memories here who don't remember 2008.” --

icepat: “If you rolled back every bitcoin transaction ever made you would end up with people in debt because the transaction fees were paid. This makes bitcoin into a scam. The miners in total are guaranteed to win, everyone else in total is guaranteed to lose. Some people haven't realized their loss but it's there. It is an ingenious scam because it's not the scammers who hype it up, no, it's the marks because the only way they can get ahead if they hype it up. The miners get their cut no matter what.”

“This is not the same for say, gold, because gold can be made into, say, electronics which now can be sold for more than the sum of the cost of the components. Stocks pay dividends etc.”

“Since so fundamentally it's a scam, is it a wonder other scams are built on top?”

sonicshadow2• 3 years ago

Hopefully next time around we can be more discerning, more usefully critical.

Like after the destruction of democracy by social media? Or the implosion of the dot com bubble? How many more times does the tech industry get to just say "Hopefully next time!"

RestlessMind2• 3 years ago

All the years and all the money spent on the mining/blockchain/smart contract/ICO/DAO/NFT/DeFi/Web3 series of bullshit "innovations" could have gone to real technology and real companies.

Really? I imagine all the effort simply redirected towards social media (bad), adtech (bad), fintech (mostly based on ZIRP, like BNPL), self-driving cars (pie in the sky) and gig economy. The only truly useful thing SV worked on in the past decade was Cloud.

unmole• 3 years ago

Beautiful

jcranmer• 3 years ago

Journalists really need to link to court documents. Although in this situation, there does seem to be quite a few of them:

US v Mashinsky: https://storage.courtlistener.com/recap/gov.uscourts.nysd.60...

SEC v Celsius: https://storage.courtlistener.com/recap/gov.uscourts.nysd.60...

FTC v Celsius: https://storage.courtlistener.com/recap/gov.uscourts.nysd.60...

CFTC v Celsius: https://storage.courtlistener.com/recap/gov.uscourts.nysd.60...

dcist2• 3 years ago

Thank you! I never understand why journalists don't link to court documents.

Workaccount2• 3 years ago

They probably do but the editors remove them.

It seems that rule number one of running a news site is to never have any external links. It's like a casino, they want you to come in and get lost.

giarc• 3 years ago

Because 99% of readers probably don't want to/won't read them.

zzzeek4• 3 years ago

newspapers can't sell ads on a remote court document site

which leads to a great business idea, run a mirror that republishes legal / government documents in a syndicated fashion with [your ad here]

1vuio0pswjnm7• 3 years ago

"Journalists really need to link to court documents."

https://news.bloomberglaw.com/securities-law/ex-celsius-ceo-...

Depends on the audience perhaps.

stefek99• 3 years ago

This is exactly stuff I'm interested in, factual source information, as opposed to media bullshit.

csours2• 3 years ago

Some people are confused about SEC involvement. As a reminder, the SEC cannot bring criminal charges. If someone gets arrested, Department of Justice decided to arrest them.

The U.S. Attorney's Office in Manhattan said it would hold a press conference at 11:30 a.m. ET (1530 GMT) to provide details on the charges against Mashinsky and Cohen-Pavon.

legitster10• 3 years ago

Sure, but the SEC completely controls the definition of criminality here. There was no arrest-able offence until the SEC made it one.

JohnFen3• 3 years ago

I think that it's more accurate to say that the legality of these actions wasn't clear, which everybody knew from the start. These companies decided to take a risk, and they rolled badly on the dice.

The legality is still unclear, too. We don't know whether or not these companies violated the law until a court rules on it.

csours2• 3 years ago

I really don't know how to respond to this. You can see the charges starting on page 37 of this document:

https://storage.courtlistener.com/recap/gov.uscourts.nysd.60...

The document references the Code of Laws of the United States of America or USC, specifically the sections on Securities Fraud, Commodities Fraud, and Wire Fraud. The SEC didn't add these sections just for this case, they were there before Celsius was founded.

justapassenger• 3 years ago

Oh no. Anyway.

elforce002• 3 years ago

And now "crypto" bros are moving to AI. The never ending story.

angry_albatross9• 3 years ago

AI is not in the same category in my book. Both may be overhyped in some ways, but blockchain technology was fundamentally a bad idea with no legitimate use cases.

bottlepalm16• 3 years ago

Bitcoin has proven to be an inflation resistant store of value enabling private and fast transactions to anywhere in the world - seems pretty successful to me despite being constantly derided by hacker news for over 10 years now.

sublinear• 3 years ago

It can be argued that probabilistic generative AI is about as equally worthless from first principles.

kayodelycaon4• 3 years ago

The one legitimate use case of using blockchain for decentralized digital currency ends up being used by everyone who can’t transfer funds using normal routes. So most of the people using it are either bad actors or speculators

Kind of like Tor. Bad actors ruin all kinds of things. People who only see technology will only go on to repeat the mistakes of the past because they lack the necessary domain knowledge to know better.

sonicshadow2• 3 years ago

I wrong

rchaud• 3 years ago

AI is exactly the same to marks that don't know any better and think complex new technology = $$$. AI having use cases for megacorps doesn't mean that scammers won't leverage the hype to sell get rich quick scams.

sleepybrett2• 3 years ago

Sure but that doesn't stop the managerial and engineering tiers of those businesses to jump ship to the new hype technology.

The managers didn't know shit but sales in the first place, sell coins or ai no difference. The engineers, just another new tech to learn.

tornato74• 3 years ago

For better or worse, Crypto is legitimately the easiest way to create a financial application, derivative, exchange etc... any programmer can create interesting, useful, and novel financial instruments like Squeeth, crvUSD, PoolTogether, etc in short order. Good luck recreating those in TradFi in under a decade, let along making them interact with each other in atomic transactions.

Of course, some people see this as a bad thing because it enables scammers to create all sorts of new and improved ponzi schemes. Others think it's a good thing because it speeds up financial innovation and levels the playing field between big banks and small startups.

Some might argue that crypto is only useful for building apps insofar as it avoids regulation, but you also can't convince me that Wells Fargo is the future of finance. Banks could never create a financial playground that works as well as Ethereum, even using their centralized database.

IMO, so many of the projects that have come out of the crypto space are awesome and promising, but investment in the space grew faster than projects could mature. Unfortunately that leads to users losing $100M when Joe Schmo's cross-chain bridge gets hacked, when it should have never had that much TVL.

Just my 2c.

RestlessMind2• 3 years ago

but blockchain technology was fundamentally a bad idea with no legitimate use cases.

Or, you live in a bubble and haven't seen any useful examples. I have compiled some for you: https://news.ycombinator.com/item?id=32406095

bottlepalm16• 3 years ago

Crypto was done in 2010. The bros tried to put their own dumb ideas on top of it like DAOs, smart contracts, NFTs, tokens, block chain xyz, etc..

Now the bros will be moving to AI, bringing along all their dumb ideas for everyone to enjoy again.

alangibson3• 3 years ago

AI has real use cases besides just doing crimes. I mean AI's most profitable use case right now is definitely crimes, but it can also be used to put people out of work.

spamizbad• 3 years ago

I've seen this but AFAIK they're all just acting as hype-men for various fluffy AI startups. They aren't building anything other than mailing lists.

zzzeek4• 3 years ago

I dunno it feels like there might be a pattern here

bottlepalm16• 3 years ago

This is great for crypto. Justice for scammers who thought crypto users could be taken advantage of without consequence. Ponzi schemes like Celsius are not exclusive to crypto and it's great to know the Justice department will prosecute scammers regardless of the unit of currency being used.

bearjaws• 3 years ago

I can't tell if this is a meme "This is good for Bit Coin" or serious.

Of course the DOJ will go after anyone committing fraud?

wmf3• 3 years ago

Nope, the DOJ only prosecutes crypto fraud after bankruptcy lawyers do all the research for them. And don't get me started on Tether.

Forgeties795• 3 years ago

I get what you’re trying to say, but honestly? All this does is hurt the reputation of crypto further. It’s yet another headline about crypto scams/ponzi scheme/etc. projected to an audience that is weary of being easily scammed out of money they believe to be safer elsewhere.

No one who is skeptical or on the fence about crypto is going to see this headline and go “oh good! They must be catching the bad guys, so now I feel more secure about getting into crypto.” Just like no one who sees an explosion in arrests of violent criminals in their home town thinks “good, must be a lot safer here now.”

codetrotter2• 3 years ago

All this does is hurt the reputation of crypto further.

There is exactly one legitimate “crypto”, and it is named Bitcoin. All else ranges from speculative promises about future possibilities (smart contracts etc) to straight up scams.

Don’t let the people abusing the name of “crypto” detract from the greatness that was the invention of Bitcoin.

bottlepalm16• 3 years ago

The nice thing about Bitcoin is that it's success is not based on good/bad PR. Bitcoin has a solid technical foundation and practical use cases that has weathered every kind of criticism for over 10 years now and is still on top.

Celsius and earn programs/scams like it is just another trial Bitcoin has passed through and is stronger for it.

shortrounddev2• 3 years ago

The best thing to come out of the pandemic is the downfall of Crypto after the federal reserve raised interest rates

thrownaway89865• 3 years ago

Would someone explain to me what the endgame of these fraudsters is? I mean, of course they are trying to get rich quick pulling these schemes but you would believe that they do it because they perceive that there is some sort of opportunity to cash out without inevitably going to prison some day, right? What is the thought process in the mind of these criminals when shit hits the fan? Maybe just hire very expensive lawyers or move to some weird jurisdiction where they can't get arrested?

deepsquirrelnet• 3 years ago

Notoriously weak prosecution of white collar crime makes more people willing to take risks. I’m not sure it’s any more complicated than that.

If you’re going to commit small scale fraud, you might as well commit large scale fraud, because on face, it seems less risky.

JumpCrisscross• 3 years ago

Notoriously weak prosecution of white collar crime makes more people willing to take risks

This is more a perceptions problem in Silicon Valley. Every fraud announcement is followed by hand wringing around the lack of prosecution. Every prosecution, convictions. Every conviction, sentencing.

kayodelycaon4• 3 years ago

You’re thinking about this too hard. The vast majority of them have either

1. Not considered what could happen after they have the money.

2. Think they are smart enough to will get away with it.

gloryjulio2• 3 years ago

There are tons of small scale influencer scammers are not prosecuted, and some could even pull the scams again. Logan Paul, techlead..u get the idea

nextworddev• 3 years ago

Didn’t techlead literally commit all the things Celsius CEO is charged for, with his Million Token?

zzzeek4• 3 years ago

the endgame is clear, be one of the 99% of fraudsters that are never prosecuted

kalverra• 3 years ago

In the case of Celsius, this seems like one of those a case of starting with good intentions, but quickly turning into fraud city in desperate attempts to keep the boat afloat.

For the more run-of-the-mill crypto scammers, there's a combination of over-confidence that no one can touch them, or will bother to come after them. Or they just don't even think that far. For a lot of the bullshit influencer pump and dumps, the worst that's happened has been ZachXBT or Coffeezilla exposing your bullshit. Which is a good thing, but the influencer just pops back up with another get rich quick scheme in a couple months for a new group of rubes.

wpietri20• 3 years ago

One of the things you have to understand about fraud is that much of it isn't rationally planned from the get-go. People get into situations and get caught up in the dynamics of them.

Imagine a founder. He has an idea he thinks is brilliant. A sure money-maker. He's a bit of a dreamer, and objective observers would question whether it's possible. But the nay-sayers have been wrong before, and he believes in the idea. So he goes looking for money.

As part of that process, he learns to pitch. He figures out the most convincing things to say, and how to say them with maximum persuasion. Is what he saying true or correct? That doesn't really matter. It might not even be knowable at this point. The key incentives for him are whether people respond emotionally in ways that they give him money.

So imagine he does that and he gets the money. He has some investors who expect big returns. They may not really understand the topic, but they liked his confidence, and they too started to believe. But what they really want is more money back, and their belief is going to be partly contingent on seeing that happen.

Our founder starts to spend the money, trying to make it real. Maybe the product works. Maybe he has some success selling it. (Maybe he is even selling it despite it not working, a surprisingly common outcome.) It's not going as well as he hoped, but he's still confident. He still believes. Because that's the performance his investors want for him. But he's used to putting a positive spin on things, so he tells investors what they want to hear that it's going great.

At some point, some of the investors get nervous. They expected returns. He led them to believe there would be big returns. So he pays some of those people some money. An accountant might say he has to pay them profits, not other investors' money. But the money's all jumbled up both in his head and in the world. If there's any impropriety, something his brain will anxiously skip over, he knows he'll make it right in the end. Because this is going to be a big success.

From there, the cycle continues. The founder digs the hole deeper and deeper over time. As long as he's confident, as long as he performs success, new money will keep rolling in. And with it comes hope. Maybe it will all work out! Maybe they'll be so successful that they'll pay everybody back and nobody will notice a little early corner-cutting.

Objectively, of course, things are getting more and more obviously criminal. But there's nobody objective around. The founder is instead surrounded by dupes, fools, and the complicit. To the extent that anybody honestly recognizes the criminality, they mostly don't talk about it or they get out ASAP.

So to answer your question, there is generally no planned endgame, the same way I didn't have a planned endgame for eating a lot of cheeseburgers in my 20s. I may have heard about the consequences, but they didn't affect my behavior. It's not that I had a bad plan. I not only had no plan, but didn't think enough about the future to even have a place in my mind where a plan would go.

skrebbel• 3 years ago

Love the cheeseburger analogy

0xDEF• 3 years ago

Many of them seem to be in the grey zone between old money and new money. Born to rich but not legally untouchable parents.

tornato74• 3 years ago

FTX, 3AC, Celsius, etc. took the crypto pill and believed their investments were going to the moon with no way to stop it. That's why they took such risky bets (with customer money, too) - because in the certain case that Bitcoin hit $1M they would be trillionaires.

Of course because of this attitude there was way too much leverage in the system, which drove up prices to ATHs temporarily, but when the money supply ran out things quickly came back to reality and that leverage turned into bankruptcy.

Though in an alternate universe, the fed never raised rates, GBTC became a spot ETF, crypto fervor continued, and SBF is the richest man on earth having leveraged customer funds in a scam that actually worked out.

esperent4• 3 years ago

in the certain case that Bitcoin hit $1M they would be trillionaires.

I never could understand this. Crypto currently makes up about 7% of the world's money supply, according to a quick search.

Bitcoin is currently ~30k USD. If you bumped that to 1 million USD, a 33x increase in value, and assume that other crypto would go up roughly the same amount...

... You get the impossible answer that crypto would be worth well over 200% of the entire rest of the money in the world.

This is ignoring inflation but from what I heard crypto nuts really thought this was possible in a short time frame, like 5-10 years, in which case inflation of real money wouldn't make a huge difference.

This is just ridiculous. All the possible outcomes don't make sense:

* you end up with a small group of mostly men controlling nearly all crypto so it's no different from the old system.

* Except there's even less checks and balances.

* It would massively destabilize the world economy and cause all kinds of inequality issues for people who don't have internet/technical ability

* But most importantly, the existing world governments would never accept it. At some point they would see this new force destabilizing their economies and established power structures and just say hell no. It would start with China and US, but eventually nearly every country in the world followed this. Then crypto is worthless because you can't spend it in a legal way and there's no way it would maintain a high value.

DropInIn• 3 years ago

Only a minority of criminals are ever arrested let alone convicted.

They hope to be in the majority who get away scot free and become one of the nouveau riche.

brucethemoose2• 3 years ago

Some of them do exit. There are many crypto pump-and-dump schemes where the project website is zombified, and the founders are MIA (and are probably sipping cocktails on a beach somewhere).

The big fish though... The FTX founder was described as being a gambling addict: he would take any risk as long as the outcome was statistically favorable. And I think this attitude was pervasive among many of the biggest crypto names. They were't looking for exits, they were looking to go even bigger because they can't help themselves.

onemoresoop• 3 years ago

I think the end game is something like making enough money such that doing some time would make it worth it, and we all know how white collar crime is punished. Of course they stash a lot of money so even after a lot of it is clawed back they keep enough.

cmrdporcupine• 3 years ago

All evidence from the people I know who have gone to work in that industry is that it's a mix of true believers, and 50% outright narcissistic sociopaths who know how to manipulate true believers.

And then about 20% of people who just think the whole thing is "nifty" and getting to write fancy software or build a business around it is kinda fun, and they paid lots, so whatever.

progbits• 3 years ago

Is there an equivalent to https://chainsec.io/defi-hacks/ which tracks crypto bros got arrested/sentenced?

legitster10• 3 years ago

Let's say I run a swap meet for people to buy and sell Pokémon cards. There are lots of scammers out there, but I promise people they are going to get good prices. And I even offer to buy cards off of people at good prices to drum up interest.

Tomorrow, the SEC decides that Pokémon cards are securities (far-fetched, but work with me here) Suddenly, anyone buying and selling them becomes a criminal. I tell people via text message "pish-posh - there's no way the SEC could enforce this". But people stop coming so I promise them that I can buy up all of their cards anyway. Especially the cards that complete my collection.

Then it gets enforced. Not only did I trade in illegal assets, I am now guilty of fraud for telling people it was safe. I am also guilty of market manipulation! And on top of it, I did it via text message so it's now wire fraud to boot.

As far as I understand reading the charges, this is mostly what he is guilty of. This is a bit different than the "true" type-1 frauds that exist in crypto - the blatant pump and dump schemes, et al. In fact, I would feel safe to say there might have been no fraud without the SEC classification. (EDIT: Ignore this since they also did a lot of legitimate fraud too)

Regardless, the writing is on the wall for crypto. I could not even fathom why you would want to be holding onto even Bitcoin or Ether right now.

dmitrygr• 3 years ago

Your example left out the crimes…

You didn’t promise people that their Pokémon cards ARE money. You didnt promise them that they WILL NECESSARILY go up in value. That’s the difference.

vkou2• 3 years ago

Let's say that your analogy has zero actual bearing on what actually happened in this situation, and end the conversation there.

He misrepresented Celsius. That's fraud. It doesn't matter if you do it with dollars, bitcoins, scrip, or Pokemon cards.

Animats2• 3 years ago

Let's say that your analogy has zero actual bearing on what actually happened in this situation, and end the conversation there.

Yes.

Here's Celsius's web site archived in early 2022.[1] See what they claimed. They went all the way to being a fake bank. In their own words:

"Meet Celsius: a community of over 1 million users that earn up to 17% yield on their crypto. Get paid new coins every week and borrow cash at 1%. Buy coins, earn yield, borrow, and transfer with no fees. Available on web and mobile apps."

[1] https://web.archive.org/web/20220103153602/https://celsius.n...

BlandDuck• 3 years ago

I think the way to understand this is that the SEC is concerned about protecting unsophisticated regular folks from being scammed.

If you started aggressively marketing your Pokemon cards, presenting them as financially sound investments, and regular people started putting their entire pension savings into them lured by false promises and being scammed, then the SEC might well take an interest in Pokemon cards as well.

In short, what qualifies as a "security" and becomes subject to regulation is fluid and endogenous. As soon it starts involving real wealth for regular folks, chances are it will be deemed subject to regulation.

legitster10• 3 years ago

I think the way to understand this is that the SEC is concerned about protecting unsophisticated regular folks from being scammed.

Keep in mind, the people the SEC are focused on "making whole" are the investors. The actual "unsophisticated investors" who make up the bulk of Celcius's customer base are going to get next to nothing out of the settlement. However, the sophisticated institutional investors who invested directly into Celsius will get most of their money back.

It would actually be a completely different legal case if they just said "Celcius misrepresented the security of their assets". In your Pokémon example where I am scamming people, they could bust me for fraud without having to reclassify all cards everywhere. But that's not the case they are making here.

2OEH8eoCRo0• 3 years ago

What about coins they created and sold?

nickphx• 3 years ago

Uhhh, two brief examples of fraud: Celsius said they had insurance to cover deposits - they did not. Celsius said customer funds are not used for high-risk loans -- they were.

kevinthew• 3 years ago

Right -- this is pretty clear cut fraud.

I think the normalization of criminal activity in the crypto space is largely due to regulatory ignorance but when there are clear cut cases of fraud, the SEC should aggressively prosecute these crooks.

vorpalhex4• 3 years ago

Suddenly, anyone buying and selling them becomes a criminal.

No, people buy and sell securities all the time. You simply need to follow the regulations for handling securities which includes certain types of tax and risk effort.

If you keep selling securities while not following the KYC and tax stuff for those securities, you will in fact be breaking the law.

Nor did the SEC magically throw down one day and start calling crypto a security. It is plainly and obviously a security _and has always been one_.

legitster10• 3 years ago

The regulations for handling securities are through a brokerage. This is a HUGE deal because handling crypto through a brokerage would basically neuter it.

Imagine trying to buy a pizza with Bitcoin, but you have to go into your Charles Schwab account and wait 3 days for the Bitcoin transaction to settle. In a brokerage system you would get the ownership stake aspect of crypto, but none of the transactional ones.

RetpolineDrama• 3 years ago

If you keep selling securities while not following the KYC

FWIW KYC "laws" are unconstitutional garbage. The government should not be able to force private companies to do the work of LEA.

And before you inevitably reply about how "it's good because it's stops XYZ"

1) It doesn't "stop" XYZ

2) I don't care, privacy and freedom are more important than catching a few more % down the long tail curve of bad guys.

DennisP8• 3 years ago

The judge in the XRP case disagreed with you today.

wpietri20• 3 years ago

The important difference being that Pokemon cards don't meet the Howey test: https://www.investopedia.com/terms/h/howey-test.asp

So yes, if finance were unregulated, then he wouldn't have been violating the securities regulations that didn't exist. But they did exist, and the Howey Test is from 1946, so it shouldn't have been a surprise. A lot of people tried to pretend that the existing financial regulations, many of which were created in response to previous scams, didn't exist. Or at least didn't apply to them.

Was this intentional fraud from the start? Or was it more like the sort of Ponzi scheme where some yutz starts off a business in hope, makes big promises, fudges the books a little, and then just gets in deeper and deeper? It's a good question for philosophers and spectators, but personally I don't care at all. And I doubt federal prosecutors care much either.

I have zero sympathy for any of these people. "Move fast and break things" is a dubious ethos even when for something as trivial as a website to post selfies. But when you apply it to the foundations of our vigorously financialized capitalist economy, it's about as smart as applying it to submarine design.

juuular• 3 years ago

You should care (not saying it's bad you don't!), because the philosophy of it helps us distinguish between a system in which people participate in good faith but get mislead and cling to bad behavior out of fear, vs people participating in bad faith thinking they can get away with it.

The difference is in terms of punishment and enforcement mechanisms. The person who keeps doing something bad out of fear that there's no way out is, in a sense, a failure of society as a whole. The person who is doing something bad as a way to get a leg up thinking they can get away with it is a failure of themselves to understand that society comes with a social contract.

The end results and the ultimate suffering are the same. For the first situation, we want to educate people such that they are more aware and can avoid falling into that trap, and give them ways to get out of the trap that minimize damage. For the second situation, we want to isolate the damage they can cause and prevent them from causing more damage because they are fully conscious of what they are doing and what is going on, and that makes them more dangerous.

If you mess up and get into an inextricable situation, there should be a way to resolve that with the promise of personal growth (along with guard rails to prevent repeating the same mistakes). If you deliberately cause an inextricable situation so you can profit off of it, the only resolution is to isolate the person who caused it from committing further harm until they go through personal growth such that they don't want to cause that harm anymore because they understand that harming others also means harming themselves in the big picture.

saurik5• 3 years ago

Which point of the Howey Test do you feel is not satisfied by Pokémon cards? (If your answer has anything to do with the existence of the game, I am curious what you think of baseball cards.)

You state that they don't satisfy the test with quite some certainty but left the reasoning to the reader; but, it would seem, to me, like Pokémon cards are no different from many of these cryptocurrencies the SEC is interested in:

In this case, some company decided to print a bunch of supposedly rare things that they pinkie swear are actually rare, even though this company can print more any time they want. People who buy these cards from the company don't even know what they are buying, which seems particularly egregious, and maybe should be regulated as an illegal lottery!

They then sell these things to people who are absolutely buying them with the expectation that they will go up in value. The people who print the cards insist they have "utility" in the form of a game people can play, and yet I have never heard of anyone actually playing this game... hell: the only 10 year old I know well happens to be obsessed with these cards and is presumably in the target market, and I'm not even certain he knows how to play the game!

Instead, this kid just keeps his cards in binders and talks constantly about their rarity and potential later sale value, as even our children are being turned into amateur investors by the marketing efforts of this company; and the reality is that--like other so-called "collectible" crazes--most of these cards are going to be near-worthless in the long term as this is just a bubble being held up by the company's management efforts designed to shill their shitcards.

bandrami2• 3 years ago

The most amusing part of crypto is watching libertarians learn in realtime why these regulations exist

jjulius• 3 years ago

The important difference being that Pokemon cards don't meet the Howey test: https://www.investopedia.com/terms/h/howey-test.asp

... Pokemon cards were only used as an example to explain what happened, almost like an ELI5. Whether they'd pass they Howey Test or not is irrelevant.

legitster10• 3 years ago

It's a good question for philosophers and spectators, but personally I don't care at all

Please don't be so narrow sighted. Have you ever been charged with a crime you didn't know was a crime? You don't think overzealous sheriffs or prosecutors love pulling out old statutes on people?

Holding people accountable for laws they had no reasonable way of knowing is a miscarriage of justice. Our criminal system absolutely takes intent into account when determining criminality and sentencing.

I have no idea why people think the Howey test is so cut and dry when courts sometimes struggle with a legal definition for a sandwich.

smogcutter• 3 years ago

Tomorrow, the SEC decides that Pokémon cards are securities (far-fetched, but work with me here)

There’s a little bit of rhetorical sleight of hand here. It’s far fetched because the analogy isn’t actually very good. This isn’t hand waving a minor problem- why the SEC is calling crypto securities and not pokemon cards is the right at the heart of the issue.

RC_ITR2• 3 years ago

Playing Devil's Advocate - The Pokémon card is a thing. I'm not buying it because I think it is a fungible asset that I can use to transact with (the thing I bought has a physical condition that can be graded, it is unique).

No one was collecting crypto to complete their collection, they were buying crypto (not caring even a little bit about which particular unique token they bought) because they thought it would be a useful tool in future monetary transactions.

The real crime here is US regulators thinking "commodities" was a fix-all solution for regulating crypto when you can eat most commodities, but not crypto (since again, If I buy orange juice futures from someone, they can't deliver me any oranges, they need to be edible and of a certain grade).

Now regulators have come to their senses, but in a really confusing and unfair way TBH.

saurik5• 3 years ago

People aren't buying Pokémon cards to "complete their collection": they are buying them because they think someone else will pay more for them later, presumably because they want to "complete their collection", but that makes just as little sense... they too will be buying it from the first person in order to sell it to a third person. There is supposedly a game attached to Pokémon cards, but that excuse to establish "utility" is pretty flimsy: even the 10 year old I know who is obsessed with these cards is only in it as an amateur investor and it isn't clear to me he even knows the results; he's simply fallen for the marketing efforts of this company shilling their shitcards on an unsuspecting populace, many of whom will lose thousands of dollars by the time this particular collectible bubble is over.

DennisP8• 3 years ago

The writing would definitely be on the wall if the SEC got to make the final decision. But they don't, and they just had a big loss in court with the XRP case. If XRP isn't a security, then most other things traded on exchanges aren't securities either.

https://www.reuters.com/legal/us-judge-says-sec-lawsuit-vs-r...

kodah• 3 years ago

Broader question: Given that SEC enforcement is speculative (eg: we think this might be a security) do they have to pay damages when they're wrong? If not, why? If so, how much?

Nursie2• 3 years ago

I don’t think it’s clear from that case that XRP is not a security - “The SEC won a partial victory as Torres found the company's $728.9 million of XRP sales to hedge funds and other sophisticated buyers amounted to unregistered sales of securities.”

It seems more that selling it on exchanges was not a violation of the law, but some of the activities around it still were.

(Edit - in fact it may not even be that, according to a footnote - "The court does not address whether secondary market sales of XRP constitute offers and sales of investment contracts because that question is not properly before the court." - so it looks like ripple aren't in trouble for selling XRP on exchanges, but that doesn't necessarily mean the exchanges aren't in trouble for it)

reaperman• 3 years ago

You may be aware already, but if you replace Pokemon with Magic the Gathering cards this actually becomes almost unbelievably close to a true story (minus the SEC story arc). The first "huge" bitcoin exchange[0] was originally a Magic card exchange which got extended to support cryptocurrencies. "Mt. Gox" = "Magic the Gathering online exchange". If it hadn't been hacked it would likely be in Coinbase's shoes right now and then your hypothetical would truly be eerily accurate. But of course it was hacked, it was a trading card exchange dealing in cryptocurrencies -- a major hack was basically inevitable.

0: https://en.wikipedia.org/wiki/Mt._Gox

celdon25• 3 years ago

Mtgox was not run very professionally, so I doubt they would have lasted this long. I had to deal with them on IRC to get my money out. I was told that the person with the keys to get my withdrawal was “in the bathtub”. This was on the last day or so before everything was shut down and during the actual crisis, mind you.

jonathankoren• 3 years ago

As an old coworker of mine said when MtGox imploded due to fraud and/or just abysmal security, “What? Don’t you do all your banking at the comic book shop?”

tinco• 3 years ago

It would never have ended up in Coinbase's shoes. The founder is a notoriously bad programmer and business leader.

Even if he wasn't hacked he would've gone bankrupt because of his failing market manipulation bot that was making loss despite having full info to an exchange in the most over heated market of the past 50 years.

I don't think even A16Z would burn their money on MtGox.

majormajor2• 3 years ago

The physical collectibles market is over a century old for baseball cards. So far the SEC hasn't stepped in for places trading baseball cards, magic cards, pokemon cards, sneakers, etc.

So the burden of proof seems to be on the claim that they're the same, or that it's a meaningful analogy.

But hey, let's look at the this case - the accused did the following:

* created their own token (ok, so they aren't just a card swap meet or trading site like your analogy)

* pumped and dumped that token

* paid ridiculous interest rates (I sure haven't seen that from the places I get my Pokemon cards...) and advertised that the principal was safe (these are wildly mutually contradictory, and many people knew it at the time)

* lent money...

ok let's stop there, we're already clearly in a different universe of financial activity.

EDIT: misattributed a followup comment

okwubodu3• 3 years ago

To be clear, I think Celsius committed actual fraud. I just want to talk about one particular point here.

So the burden of proof seems to be on the claim that they're the same, or that it's a meaningful analogy.

I have a pair of “Dear Summer” Off-White x Nike Dunk Lows, the last collection released while Virgil Abloh was alive. The SNKRs (Nike) app randomly selected active users for the chance to purchase them; necessary, because they were guaranteed to sell out instantly. At the time of purchase nobody had any clue what the shoes would look like, nor which "n of 50" colorway they would get. We were presented with a picture of the shoebox, a size selection, a buy button, and a countdown timer. However, it's not far off to say that despite this, every single person (remember, only active users got this notification) that initially purchased the shoe did so knowing there was absolutely no chance that a limited edition Off-White/Virgil Abloh/Nike shoe would sell for less than a 100%+ premium over retail on the aftermarket. Completely risk-free, assuming $180 wouldn't hurt your pockets in the near term.

Under the SEC's reading of the Howey Test that omits the word "solely," the purchase of these shoes constitute

1. An investment of money (check)

2. In a common enterprise (check. Let's be honest, the majority of pairs sold hit the resell market immediately. Forman, 421 U.S. at 852-53 may not be applicable.)

3. With the expectation of profit (check, check, check) to be derived from the efforts of others (the ongoing reputation and marketing efforts of everyone involved),

making them unregistered securities.

Naturally, this means Nike has to "come in and register," for every limited supply drop, StockX and GOAT have to register as securities exchanges, and only accredited investors are allowed to purchase at retail. Anything else is clearly a violation of The Law.

All of this is perfectly reasonable because, "the law is clear, we’re obligated…to enforce the law as Congress passed it and how the courts interpret it," as Chair Gensler put it.

afterburner4• 3 years ago

Crypto assets are illegal if you try to dodge taxes. Or, as a trading institution, pretend that you have no duty to follow tax laws on reporting client transactions. They're no different than equities if you follow all the laws.

This all seems weird to me in Canada. Here, it's been acknowledged for years that crypto = equities.

Fraud is illegal either way though.

legitster10• 3 years ago

The tax thing is overrated. Equities have to be traded through a brokerage and that's the real death knell for crypto.

If your dream is to be able to buy a pizza with bitcoin, having to do the transaction via your respective brokerages would not work.

jncfhnb• 3 years ago

As others have pointed out this analogy is kind of bad. But… also you seem to clearly acknowledge within the hypothetical that performing an action would be a crime, and then do the action. And then you’re upset because it wouldn’t have been a crime if it hadn’t been made a crime… but it was and you knew that and you did it anyway.

Ensorceled• 3 years ago

Yeah, these analogies are always terrible, but this one actually includes the "hey they ruled it was a crime and I decided that was bullshit and kept criming" part.

shawndrost• 3 years ago

This is a truly insane apologia for a firm which marketed a banking-like product with risk-free returns of up to 17%.

Mashinsky explained that Celsius's rates were so much higher than bank deposit rates not because it was riskier than a bank, but because it passed along more of its earnings to customers. “Somebody is lying,” said Mashinsky: “Either the bank is lying or Celsius is lying.”

Our_Benefactors• 3 years ago

Maybe I’m misunderstanding the analogy, but I thought wire fraud only applied to abuse of the bank wire system? Is unsavory advice really categorized as wire fraud?

salawat• 3 years ago

A legal "wire" is any communication or signaling system allowing for the propagation of information across State lines, at least as far as I can tell from how it is regularly enforced.

You could use TCP over carrier pidgeon to implement your criminal communication network, and it'd still be eligible for wire fraud. The deserialization from what I assume would be message packets strapped to the pidgeon nets you as still using "electronics".

https://www.law.cornell.edu/uscode/text/18/1343

jrflowers• 3 years ago

In this analogy you also had a service where people staked their Pokémon cards and advertised an APY% rate of return on those Pokémon cards, and had a service wherein people could use borrow and lend their Pokémon cards with the intent of financial gain.

__loam• 3 years ago

Whether something is a security is up to the SEC and other federal agencies, not the companies making Crypto.

Ignorance of securities regulation isn't an excuse.

DennisP8• 3 years ago

Based on today's XRP case, it appears to actually be up to the courts.

tomcar288• 3 years ago

what does bitcoin have to do with it?

If anything, holding bitcoin (with self custody) protects you from this sort of thing because there's no counter party risk. From that standpoint, holding bitcoin does not have counter party risk, unlike holding gold or equities in an online account.

don't throw the baby out with the bathwater.

ajross• 3 years ago

Tomorrow, the SEC decides that [whatever] are securities

That's not really the way this works. "Security" is defined by law, not by the SEC. Existing stock markets and other trading entities have existing regulatory relationships with the SEC, but the SEC's enforcement powers aren't remotely limited just to the NYSE et. al. The question is why Celsius thought they didn't need to follow securities regulation, given their business.

Because, and let's be honest here, crypto coins and assets are really just obviously securities by any reasonable interpretation. They're abstract tokens of ownership, they're liquid, they're traded with others in the same kind of way (via an exchange intermediary), and for the same reasons (investment).[1]

Clearly this was the way things were going to shake out. Could the SEC have been clearer? Surely. But to pretend that Celsius couldn't have seen this coming is ridiculous.

[1] FWIW: note that trading cards and other collectibles fail most of these tests. While sometimes you buy them for investment or on exchanges, they remain primarily physical devices providing a means to play a game.

Natuerich• 3 years ago

I find it far fetched that those experts didn't knew they are acting as a type of bank and wouldn't talk to a lawyer upfront.

I did clarify things with a lawyer for a very small company.

They accepted the risk, they lost.

sroussey2• 3 years ago

More interesting idea: tomorrow Microsoft delists from public exchange and only allows OTC to buy/sell this now private company — but you can only do so with Pokémon trading cards. And anyone that owns some is now a MS owner as well.

Now do you decide the Pokémon cards are securities?

themagician• 3 years ago

The SEC doesn't bring criminal charges. The SEC pursues civil action. The SEC tries to hold people liable for the damages they cause, and the bar here is relatively low—a preponderance of evidence (more likely than not) is all that's needed.

If they suspect something is criminal they will then recommend that the Justice Department seek criminal charges. Different legal case, and this has a much higher bar.

Reporting on the SEC often gets mixed up and convoluted. You read about the SEC "charges" and a not guilty criminal plea, but these are actually two separate legal cases happening simultaneously. This is the way it usually happens, since the SEC is unlikely to "enforce" the law (since they can't) unless they can get the Justice Department to bring charges. It's much easier to pursue civil litigation and hold people responsible if you can get a criminal conviction.

If you are facing a criminal trial for fraud there is likely substantial evidence that doesn't fully come through in the reporting. Criminal charges like this don't actually happen that often, which is why the SEC is said to be toothless. They only really pursue if they think they can get the Justice Department onboard AND they can get a criminal conviction. Yeah, yeah, innocent until proven guilty and all that… but if you are facing allegations from both the SEC and the Justice Department you've probably done something pretty heinous.

LapsangGuzzler• 3 years ago

In order for your analogy to hold, you can’t forget about the part where you constantly push the idea that trading Pokémon cards is a better way to make money than banking, manipulating the prices of cards and lying about how the cards are priced.

Guys like Mashinsky bad-mouthed banking nonstop and touted their exchanges as more equitable platforms to store and make money.

chemmail• 3 years ago

If you really look deep down into crypto, its really just Uber or Airbnb skirting the law with technical, and often mental loopholes. You need a license to drive taxi or rent out your place. But NO i'm just sharing my ride or i'm just sharing my house, no taxi/renting going on here! At the end of the day you are offering the same service that is regulated, calling it something else can only get you so far until you pay all the politicians off. The real issue here is crypto paid off the wrong people.

bandrami2• 3 years ago

Uber can't take street hails, though, which is what you need a taxi medallion for. That's why they're a fleet limo service rather than a cab company.

sethd• 3 years ago

legitimate fraud

I understand the intent, but part of my brain is having a hard time with this wording. :)

nathias• 3 years ago

because we don't like tyranny

herbst2• 3 years ago

I could not even fathom why you would want to be holding onto even Bitcoin or Ether right now.

The US is not the world. There is far more usage and legit use of crypto than whatever US regulators seem to think.

bdcravens2• 3 years ago

True, but like in many things, it makes up a significant amount of the the market. What happens in the US will affect the market rate worldwide.

pluc• 3 years ago

Say it with me:

crypto is fraud

gdsdfe• 3 years ago

it's kinda ironic that crypto started as a rebellion against the banks that are stealing our money and all that

anaganisk• 3 years ago

You aren't a rebel if you go mainstream, either die a hero or live long enough to see yourself become the villain.

wmf3• 3 years ago

Bear with me here, but what if that "rebellion" ended in 2010 before people even heard of crypto.

FactualOrion• 3 years ago

People should look into his wife's actions as well, selling merch making fun of victims of her husband etc. Great news to hear though.

neom2• 3 years ago

Just put her in a room alone with Tiffany Fong for a half hour, all will be right in the world.

https://www.youtube.com/watch?v=6FONC7njr64

misiti3780• 3 years ago

He has quite the personal website: https://www.mashinsky.com/

dsalzman• 3 years ago

Hopefully he updates https://www.mashinsky.com/failed-ventures

popcalc• 3 years ago

Groundlink vision was that happy drivers = happy customers while Uber was subsidizing rides for Millennials = IPO of a money loosing business.

When people miss basic typos it can sometimes expose a culture of grift going all the way down. The reason many dictators have horrendous interior design in their palaces. Their cousin gets the contract and then it gets outsourced in a chain a dozen times before someone buys the actual thing off AliExpress and pockets $5.

FreshStart• 3 years ago

Okay, now that I have your attention, how about a new sort of crypto investment. Let me pitch you.. A privatized prison just for crypto scammers and bros. They could be the almost free hb1-labour, but with alot more entrepreneural spirit. Get coders, managers and advertisers at very reasonable prices. Payable even bitcoin or montero.

rubyron• 3 years ago

Could heat the place with GPUs.

neom2• 3 years ago

The (block)chain gang.

naikrovek• 3 years ago

I'm shocked! SHOCKED! Well, not that shocked.

cryptocurrency is very attractive to people who want to scam people out of money, and ransomware probably wouldn't exist without it.

I say pour on the hate for cryptocurrency. The hate is justified and fully earned.

sakopov• 3 years ago

Well that's definitely one way to "unbank" yourself.

stuckkeys• 3 years ago

Waa looking to see if he was featured in the Forbes magazine front cover. He was somewhat praised in their articles. I guess it is true, Forbes is the honeypot for Tech scumbags haha

bertil• 3 years ago

I haven’t followed crypto very closely, but I noticed a few names. I’ve read the headlines for the last few weeks. It seems like most prominent players are now in legal trouble, enough to force them to cease operations.

Who are the most prominent players who are operating?

latchkey8• 3 years ago

Brian Armstrong

worstestes• 3 years ago

CZ

hopefully not for much longer

dcist2• 3 years ago

Vitalik Buterin

mousetree• 3 years ago

Obligatory Matt Levine article on the topic: https://www.bloomberg.com/opinion/articles/2023-07-13/celsiu...

rossdavidh• 3 years ago

It probably makes me a shallow person, but the only financial news that I find worth reading (i.e. afterwards I understand things a little better) is Matt Levine's column.

ValentineC• 3 years ago

Obligatory paywall bypass link: https://archive.li/vELkq

sharts• 3 years ago

Meh, the SEC is merely concerned with looking like a reputable and trustworthy authority.

After some fines are paid, all will be well. This is theater.

Founder of crypto lender Celsius Network arrested, charged with fraud

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