Celsius Faces Lawsuit From Former Partner KeyFi


Key Takeaways

  • Jason Stone, the head of KeyFi, says that Celsius owes money after KeyFi briefly managed client funds on its behalf.
  • Celsius supposedly failed to hedge against risk, which became clear when KeyFi attempted to unwind its positions.
  • Though Stone initially tried to resolve the conflict directly, he is now taking the matter to court to reach a settlement.

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Celsius has been accused of fraud by the head of KeyFi, which formerly managed a portion of Celsius’ customer deposits.

KeyFi Managed $2 Billion for Celsius

Jason Stone, co-founder and CEO of KeyFi, says that Celsius defrauded it during their brief business relationship.

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In 2019, Stone founded a company called KeyFi, which Celsius began to acquire in mid-2020. Stone says he “pivoted” his firm to create DeFi strategies for Celsius at that time.

In August 2020, Stone’s team began to manage a new Ethereum address starting with 0xb1, which held deposits from Celsius’ customers. Celsius shared the private keys to that address with KeyFi and tasked it with investing customer funds.

The two companies later stopped working together. At one point, before the two companies split apart, KeyFi was “managing nearly $2 billion of assets,” Stone wrote in his Twitter thread.

KeyFi Says Celsius Owes It Money

Stone says Celsius’ risk management team monitored KeyFi’s investment strategies. It assured KeyFi that it was hedging against market fluctuations and impermanent losses from liquidity pools.

However, KeyFi soon found that Celsius was not in fact hedging against those risks. Rather, Celsius had “naked exposure to the market.” By the time that KeyFi attempted to unwind its DeFi positions, Celsius had reportedly suffered impermanent loss.

According to a legal filing, Celsius refused to recognize Stone’s resignation and denied payments owed. Stone suggests that Celsius believed that the loss meant that he had stolen money from it and continued to hold him responsible.

Stone says that he has privately attempted to resolve the dispute with Celsius and obtain the money owed. Now, Stone is taking the matter to court to reach a settlement.

That lawsuit additionally alleges that Celsius “leverag[ed] [its] customer deposits to manipulate crypto-asset markets” and improperly accounted for certain transactions.

Celsius Withdrawals Remain Frozen

Celsius has not commented on the accusations, nor has it confirmed that it worked with KeyFi. According to the lawsuit, the two parties worked on an informal handshake agreement.

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Celsius froze withdrawals and other activities on Jun. 12 and has said little since then. On Jun. 30, the firm said that it is exploring strategic transactions and liability restructuring.

Other reports suggest that the company is restructuring its board of directors, while companies such as Goldman Sachs appear to be willing to buy out the company’s assets for $2 billion.

It is now twenty-five days since Celsius suspended its services. As the crisis continues, it is increasingly unclear whether clients will eventually regain access to their funds.

Disclosure: At the time of writing, the author of this piece owned BTC, ETH, and other cryptocurrencies.

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