DeFi entrepreneur Jason Stone—one of the individuals behind yield farming account 0xb1 and CEO of KeyFi, Inc.—is suing crypto lending platform Celsius for allegedly refusing to honor its contract. Stone is seeking damages for an amount “to be determined at trial.”
In the lawsuit filed in New York on Thursday, KeyFi alleges Celsius used customer funds to “manipulate crypto asset markets, had failed to institute basic accounting controls which endangered those same deposits, and had failed to carry through on promises.”
In a lengthy Twitter thread, Stone said the DeFi account 0xb1 was managing nearly $2 billion in assets for Celsius at one point and that Celsius “assured” him that it was taking adequate risk management measures, such as “hedging any potential impermanent loss from our activities in liquidity pools.”
In August 2020, 0xb1 was created, along with other addresses, to send @CelsiusNetwork’s customer deposits to us to manage.
In simple terms, impermanent loss occurs when the price of tokens deposited into a liquidity pool changes compared to the price at which they were deposited. This can lead to a loss of value if traders withdraw in the interim, though decentralized exchange fees paid out to liquidity providers can mitigate losses.
But Celsius’s promises were empty, according to Stone.
“In late Feb 2021, we discovered Celsius had lied to us,” Stone wrote. “They had not been hedging our activities, nor had they been hedging the fluctuations in cryptoasset prices. The entire company’s portfolio had naked exposure to the market.”
Per the lawsuit, Stone also learned that Celsius’ alleged lack of proper accounting led to a reported $200 million liability that Celsius “did not even understand how or why it owed.”
A few weeks later in March 2021, Stone and the team behind 0xb1 decided to cut ties with Celsius. But during that departure process, Celsius reportedly suffered impermanent loss.
Stone told Decrypt via Telegram message that this “unwinding” process of the KeyFi and Celsius relationship has “no correlation” with Celsius’ subsequent impermanent loss that followed.
They later came to accept the IL for what it was, but claimed I was responsible for it. They completely ignored the fact that they had full visibility into all trading strategies deployed by KeyFi and promised to hedge that exact risk.
Stone wrote on Twitter that Celsius reportedly owes KeyFi “a significant sum of money” and he has been trying to resolve the issue for over a year.
“Celsius has refused to acknowledge the truth or their failures in risk management and accounting,” Stone wrote, adding that he is taking legal action against the firm in an effort “to settle this issue once and for all.”
Surprisingly, the lawsuit states that Stone and KeyFi “operated without any formal written agreement” despite KeyFi reportedly generating hundreds of millions of dollars for Celsius and its customers.
According to the lawsuit, “the recent revelation that Celsius does not have the assets on hand to meet its withdrawal obligations shows that Defendants were, in fact, operating a Ponzi-scheme.”
“As customers sought to withdraw their ether deposits, Celsius was forced to buy ether in the open market at historically high prices, suffering heavy losses,” the suit explains. “Faced with a liquidity crisis, Celsius began to offer double-digit interest rates in order to lure new depositors, whose funds were used to repay earlier depositors and creditors.”
After reading the Celsius-0xb1 lawsuit my initial conclusion is that the industry is a total joke
– Tether gave them a 1b loan??? – Celsius used customer BTC to pump their own token – USD performance metric when liabilities were in ETH – handshake deal to manage 9 figures
KeyFi’s legal filing comes just a few weeks after Celsius reportedly hired advisors to help prevent a potential bankruptcy following news that Celsius suspended withdrawals on June 13 for all its customers.
Decrypt has not independently verified the lawsuit’s claims. Celsius has not yet responded to Decrypt’s request for comment.
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