Bankrupt crypto lender Celsius has filed several lawsuits in recent weeks seeking to recover billions of dollars in funds from creditors, including some of the world’s largest crypto companies. tether USDT
+0.031%
. Other companies that have suffered various losses and failures since 2020 include Badger DAO, Compound, and Bancor, which are partially owned by the nephew and niece of Israeli Prime Minister Benjamin Netanyahu.
The lawsuit against Tether is the latest in a series of lawsuits seeking to recover withdrawals and priority payments during the crucial 90 days before Celsius went bankrupt, while the lawsuits Celsius has filed against other DAOs are more general complaints of mismanagement that resulted in losses. Tether strongly denies wrongdoing, calling the lawsuit the “Shake Down lawsuit” in a blog post.
Celsius vs Tether
The largest lawsuit, filed Friday, targets Tether for 39,542 bitcoins, worth more than $2.4 billion at current prices. Celsius says this is collateral for a loan it received from Tether, the world’s largest stablecoin issuer. When prices began to fall in early 2022, Tether asked Celsius for more collateral to shore up the loan, which the lender transferred in the form of bitcoin several times in May and June. Celsius also borrowed an additional $300 million in USDT starting in April 2022, crucially within 90 days of Celsius filing for bankruptcy in July of that year.
The lawsuit claims that without this transfer, “Tether would not have come close to recovering the full $812.33 million USDT it loaned to Celsius,” and that “if the transfer had not occurred, Tether’s collateral would have been reduced by over $350 million.”
According to the lawsuit, after Celsius met Tether’s request for additional collateral of 3,000 bitcoins (valued at approximately $350 million at the time) on June 12, 2022, the stablecoin issuer requested a second collateral request. While Celsius was raising funds during the contractually mandated 10-hour waiting period, Tether decided to liquidate Celsius’ entire collateral of 39,542 bitcoins in just a few hours.
Celsius’ lawsuit claims that the lenders could have minted the bitcoin if they had been given the full time allotted to them in the contract. “Had Celsius been given the opportunity to satisfy the collateral demand (which it was contractually entitled to do), it would have avoided a bitcoin foreclosure near the bottom of the cryptocurrency market. Instead, the foreclosure was conducted for the benefit of a single creditor, namely Tether,” the lawsuit states. “In the chaos of June 13, 2022, Celsius CEO Alex Mashinsky allegedly authorized Tether to “orderly” liquidate Celsius’ collateral.”
The lawsuit states that Tether received an average price of $20,656.88 per bitcoin, which was “significantly lower than the Bitcoin price of $22,808 at the time the collateral was liquidated on Bitfinex, a cryptocurrency exchange controlled by Tether’s parent company.”
Tether strongly denied any wrongdoing in a blog post, writing, “We look forward to responding in court to this fabricated and baseless threat that benefits no one but the lawyers, bankers, and consultants who brought this case forward.” Tether CEO Paolo Ardoino echoed X’s sentiments, saying, “The Claimant’s submissions are subject to many flaws and we are very confident in the soundness of the Agreement and our actions.” .
Celsius v. Banker
In a lawsuit filed on July 12, Celsius targeted the founders of Bancor DAO, a decentralized trading protocol powered by an automated market maker (AMM) on Ethereum. The protocol is alleged to be immune to impermanent loss (IL), a type of loss that occurs when someone supplies two unrelated crypto assets to a liquidity pool. Notably, two of the defendants are brothers Galia and Guy Ben-Artzi, founders of Bancor DAO and LocalCoin and nephews of Israeli Prime Minister Benjamin Netanyahu.
The lawsuit claims that Bancor’s mechanics were flawed from the beginning. “According to Defendants, impermanent loss protection was supposed to be paid for by fees incurred by the protocol. However, the fees incurred by the protocol were never enough to cover the cost of IL protection for all LPs (liquidity providers). In fact, they only covered a portion of the IL that was never realized by the system,” the lawsuit states. “Consequently, if enough LPs were to withdraw their assets simultaneously, there would not be enough funds to provide IL protection for all withdrawals, and the protocol would enter a “death spiral” similar to a bank raid.”
Bancor was eventually forced to use emergency DAO powers to suspend the temporary loss protection, which Celsius’ lawsuit claims the founders were aware of because an economic report commissioned by consulting firm Topaze Blue showed Bancor’s fees were not enough to fully cover the temporary loss. The Block could not immediately reach Bancor for comment.
Celsius’ lawsuit claims that the procedures that passed the temporary loss protection as an emergency measure were inadequate, and that Celsius attempted to withdraw its funds as the protocol struggled. “From June 23 to 27, 2022, Celsius withdrew 14,878 ETH from the protocol. Because Defendants improperly suspended IL protection and token rebalancing, Celsius only received 8,338 ETH. As a result, Celsius lost 6,540 ETH, which had a market value of approximately $7.8 million at the time,” the lawsuit states. At current prices, that’s approximately $17 million.
Celsius vs Badger and Compound
Two additional lawsuits filed in July were filed against Badger DAO and Compound Labs for losses suffered by Celsius due to the Badger DAO hack and Compound’s oracle-related liquidations.
The lawsuit against Badger DAO was filed against the protocol’s founder, Christopher Spadafora, and accuses him of misrepresenting the protocol’s security and the service provider, Cloudflare, of failing to provide reasonable safeguards, which led to a $120 million exploit in December 2021.
Unlike many other DeFi hacks that directly target the protocol’s smart contracts, Badger DAO’s attackers were able to use fraudulent Cloudflare credentials to compromise the frontend website and inject malware that gave the attackers access to the linked wallets. Once enough whales, including Celsius, fell for the trap, the attackers were able to flee Celsius with funds, including over $50 million in Bitcoin, according to the lawsuit.
The lawsuit alleges Cloudflare was grossly negligent and Spadafora breached his fiduciary duty by failing to protect his front-end website, and seeks damages in an amount to be determined at trial. The Block was unable to immediately reach Cloudflare or Spadafora.
Lastly, in a notable lawsuit, Celsius targeted Compound Labs, the company behind Compound Finance, for its alleged role as the sole source of information on Compound’s oracles, and its involvement in the liquidation surge that occurred when the price of the stablecoin DAI soared to $1.30 on Coinbase Pro.
“As a direct result of the DAI price spike, Compound initiated 8 liquidation transactions from the Celsius wallet, resulting in a total of 2,509,770.21 cETH being withdrawn from the wallet and distributed to various liquidator wallets. Those 2,509,770.21 cETH could have been redeemed for a total of 50,268.9529 ETH, all of which Celsius was required to buy back on the open market following the liquidation event,” the lawsuit states.
Celsius claims that the liquidation incident could have been avoided if Compound had used multiple oracles for its price feeds as claimed in the protocol’s white paper. “Celsius would not have suffered any harm had Compound Labs not failed to design, operate, and maintain Compound,” the lawsuit states.
It is not yet known whether the court will hear Celsius’s lawsuit. The company recently reached a settlement with KeyFi founder Jason Stone, agreeing to liquidate hundreds of other tokens and NFTs in connection with the settlement.
Disclaimer: The Block is an independent media outlet providing news, research and data. As of November 2023, Foresight Ventures is the largest investor in The Block. Foresight Ventures invests in other companies in the cryptocurrency space. Cryptocurrency exchange Bitget is an anchor LP of Foresight Ventures. The Block continues to operate independently to provide objective, impactful and timely information on the cryptocurrency industry. Current financial disclosures include:
© 2024 The Block. All rights reserved. This article is provided for informational purposes only. It is not provided or intended to be legal, tax, investment, financial or other advice.