Regulatory Roundup: The Fraud and Market Manipulation Behind the Crypto Bank-Run

Analysis

The Fraud and Market Manipulation Behind the Crypto Bank-Run

Coming into 2025 we find ourselves riding a cryptocurrency tailwind, with Bitcoin surpassing $100k, MiCA coming into the EU, and several new initiatives announced under the new U.S. administration. I thought to take this opportunity to reflect on one of the largest crypto collapses of 2022, the former “bank” of crypto, Celsius Network, whose former-CEO recently pleaded guilty to multi-billion-dollar fraud and market manipulation schemes.

This was one of the largest crypto collapses we’ve seen, with $4.7 billion crypto assets frozen from investors after they abruptly halted all withdrawals. While its slogan “unbank yourself” proved ironic when it appeared that Celsius succumbed to a common bank-run following the collapse of LUNA, parallel investigations by the Department of Justice (DOJ), U.S. Securities and Exchange Commission (SEC), and U.S. Commodity Futures Trading Commission (CFTC) subsequently revealed that there was much more happening below the surface.

The Rise and Fall of Celsius

Before diving into the fraud and market manipulation, let’s have a quick look at the rise and fall of Celsius. According to their archived website, which serves as a window into 2020’s crypto landscape, it all started on a coffee napkin in 2017. This evolved into a crypto asset platform that would custody customer crypto assets and allow them to earn returns on those assets or take loans secured by them. The platform’s main attraction was the “Earn” program, which allowed Celsius to invest the customer assets and reached a point of offering yields as high as 18%. By 2021, Celsius was estimated to hold $25 billion in assets; however, the CFTC filing would later cast doubt on that number.

This all came crashing down in spectacular fashion in June 2022. The previous month’s TerraUSD-LUNA collapse had spooked the market, leading to persistent rumors of liquidity issues and investment losses for Celsius. These rumors were denied until June 13th, when Celsius abruptly paused all customer withdrawals. One month later, the company filed for bankruptcy, revealing a massive hole in its balance sheet and 600,000 unsecured depositors owed $4.7 billion. Most commentary at the time chalked it to a classic bank-run; however, DOJ, SEC, and CFTC investigations in the following year suggest that there was much more happening behind the scenes than people realized.

“There is No Hope … There is No Plan”

The DOJ case, which had a guilty plea last month, revealed two instances of fraud in the earlier timeline. Firstly, most of the business and risks were misrepresented. While we won’t go through all the false statements, the summary is clear: you weren’t getting a low risk 18% return. Shocking. The CFTC case gives a pretty thorough rundown of many misrepresentations. The SEC filing also includes some revealing employee messages ranging from “we don’t have any profitable services” to “the current business model is not financially sustainable” to the incredibly stark “there is no hope … there is no plan.”

Propping up a Proprietary Token

The second part of the case revolves around market manipulation, which is a bit more complex. The manipulation relates to the Celsius proprietary crypto token CEL, and what’s interesting is how this was achieved. A portion of the interest (or rewards) to investors was paid in CEL, making it in Celsius’ interest to maintain CEL’s value at a high level. CEL was also traded on secondary markets, and the public perception of the business’ success was tied to the success of the CEL token. One employee wrote that “the higher” the price of CEL, “the more people understand Celsius is a legit company and will get customers.”

Celsius propped up the price a few ways. First, it used company funds, including depositor funds to purchase CEL. The SEC filing shows that much more CEL was purchased than was needed to fund interest and rewards payouts.

Celsius staff also devised a scheme to use its own OTC desk to help fund and hide the activity. Transactions on the Celsius platform were only reflected in internal records and not on the blockchain or to other users on the platform. The SEC filing states, “Celsius would sell CEL via the non-public OTC desk, and use the proceeds to turn around and repurchase CEL via public means and boost its price.”

This CEL would then be sold back onto the non-public OTC desk. In some circumstances, Celsius would strategically time the activity, where its public buying would push up confidence and the price enough for its non-public OTC selling to make a significant profit.

This case is a great example of the many layers of fraud and mismanagement that can exist in one company. On top of that, the manipulation portion shows the unique challenges and risks that arise when platforms issue and run their own tokens. These are challenges that we need to ensure are addressed in the new crypto wave.

Capital Markets Regulatory Updates

21 January: The SEC announced that President Trump designated Mark T. Uyeda as Acting Chairman of the SEC, where he has served as a Commissioner since 2022 and previously held various roles since 2006. Uyeda was recently confirmed for a five-year term until 2028, and has expressed commitment to the SEC’s mission of protecting investors, maintaining fair markets, and facilitating capital formation.

21 January: The SEC Acting Chairman Mark T. Uyeda established a new crypto task force to develop clear regulatory guidelines for crypto assets, moving away from the SEC’s previous enforcement-focused approach. The task force aims to create practical registration paths and sensible disclosure frameworks while coordinating with other regulatory bodies and gathering input from various stakeholders.

20 January: The members of the CFTC unanimously elected Commissioner Caroline D. Pham as Acting Chairman. Acting Chairman Pham aims to refocus and change direction with new leadership to fulfill the CFTC’s statutory mandate to promote responsible innovation and fair competition in our markets that have continually evolved over the decades.

17 January: The Federal Reserve Board announced its withdrawal from the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).

17 January: The Autorité des Marchés Financiers (AMF) announced its action and supervisory priorities for 2025, which align with its ‘IMPACT 2027’ strategic plan and focus on 13 priority actions across six strategic areas including market supervision, investor protection, and sustainable finance.

16 January: The Bermuda Monetary Authority (BMA) released its 2025 Business Plan, outlining commitments to enhance regulatory frameworks and ensure operational efficiency, with key focuses on green initiatives, digital innovation, and customer protection.

15 January: The World Economic Forum (WEF) published the 20th edition of its Global Risks Report, revealing an increasingly fractured global landscape, where escalating geopolitical, environmental, societal and technological challenges threaten stability and progress.

Fines & Enforcement Actions

The Regulatory Division of the Bourse de Montréal Inc. (the “Bourse”) fined a financial services firm $113,000 plus $8,000 in costs for allowing unauthorized access to nine employees between 2019-2023.

The Hong Kong Independent Commission Against Corruption (ICAC) charged a former SFC Associate Director with conspiracy to pervert justice after the former Associate Director allegedly advised market manipulation suspects on how to handle investigations and destroy evidence.

The U.K. Financial Conduct Authority (FCA) fined Arian Financial LLP £288,962.53 for inadequate financial crime controls. This case marks the seventh enforcement action by the FCA regarding cum-ex trading, with total fines now exceeding £22 million.

The CFTC ordered Gemini Trust Company to pay a $5 million penalty by the U.S. District Court for making false or misleading statements to the Commission regarding a bitcoin futures contract certification in 2017.

The CFTC announced that a Florida district court entered final default judgments against Mosaic Exchange Ltd. and its CEO for running a fraudulent digital asset scheme that defrauded 18 individuals. The defendants were ordered to pay approximately $1.2 million in combined penalties and restitution and were permanently banned from CFTC-regulated markets.

The SEC obtained final judgements against a former Pfizer statistician and his business partner. The individuals were found guilty of insider trading after making profits of $214,395 and $60,300 respectively by trading ahead of Pfizer’s Paxlovid announcement in 2021.

The SEC charged nine investment advisers and three broker-dealers for failing to maintain and preserve electronic communications, with the firms admitting to violations and agreeing to pay combined penalties of $63.1 million.

The SEC charged broker-dealer SpeedRoute LLC for failing to file Suspicious Activity Reports (SARs) between 2020-2023, due to inadequate surveillance and investigation of suspicious trading activity from its clients. Without admitting or denying the findings, SpeedRoute agreed to pay a $600,000 penalty and be censured by the SEC for violating Exchange Act requirements.

The SEC announced that Robinhood Securities LLC and Robinhood Financial LLC have agreed to pay $45 million in combined civil penalties to settle multiple regulatory violations, including failures in suspicious activity reporting, identity theft protection, cybersecurity, and recordkeeping requirements.