Cryptocurrency lending platform Celsius Network LLC has been accused of fraud and acting as a “classic ‘Ponzi scheme’” in a lawsuit filed by Jason Stone, the chief executive of KeyFi Inc.

The lawsuit comes at a time when Celsius is facing continuing problems after it had to suspend withdrawals during a downturn in the crypto markets.

In the lawsuit, filed in New York on Thursday, Stone alleges that Celsius owes his company “millions of dollars” as part of a profit-sharing agreement and that Celsius had been using its own customer deposits to “manipulate crypto-asset markets” and “had failed to institute basic accounting controls which endangered those same deposits.”

Celsius is a platform that provides crypto financial services for its customers by allowing them to earn interest on their crypto assets. It does so by accepting crypto assets and allowing them to lend them out to others and also investing those funds in other crypto markets. Some accounts on Celsius can offer yields up to 19%, depending on the type of assets involved.

Stone’s company KeyFi assists with crypto trading strategies and made a “handshake deal” with Celsius in August 2020 to manage the assets of the company beginning in August 2020.

During his time working with Celsius, Stone claims, he began to notice issues such as a lack of security controls and mismanagement of customer funds. The lawsuit alleges that the company uses its own customers’ funds, such as bitcoin deposits, to inflate the value of its own native currency, called the Celsius token, or CEL.

One example the lawsuit alleges included a $200 million liability on the books that the management did not even realize the company owed.

The lawsuit also claims that Stone took these concerns to Celsius management and was told that the company was “hedging transactions” to ensure that volatility in the market would not affect the company or its ability to repay customers. However, Stone said that he came to believe these assurances were lies, so he quit his work with Celsius in March 2021.

“these promises were lies,” the lawsuit claims. “Despite its repeated assurances, Celsius failed to implement basic risk management strategies to protect against the risks of price fluctuation that were inherent in many of the deployed investment strategies.”

In January 2021, crypto markets began to rise, but the lawsuit alleges that Celsius did not have proper holdings in the cryptocurrency Ether to cover withdrawals. As a result, it was forced to purchase Ether at exorbitant prices to cover withdrawals and draw upon customer deposits and increased interest rates to attract new depositors and use their funds to repay earlier customers.

“Thus, while Celsius continued to market itself as a transparent and well capitalized business, in reality, it had become a Ponzi scheme,” the lawsuit further claims.

Following massive market volatility in 2022, Celsius suspended trading and withdrawals from its platform citing “extreme” market conditions on June 12. At the time, the company’s CEL token market value fell 50% within an hour.

That happened when Celsius had become swept up in the crypto market downturn after the crash of the “algorithmic” stablecoin TerraUSD and its sister currency Luna lost 99% of its value, shedding $60 billion in value in a matter of days.

Celsius has not yet resumed withdrawals, approximately a month after suspending them.

The lawsuit from Stone also follows a recent report from the Wall Street Journal that Celsius had enlisted restructuring consultants from an advisory firm on June 24.

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