Two former directors of the collapsed crypto lender Celsius Network have a warning for digital assets firms wishing to avoid a similar fate: “Grow the f*** up”.
Matthew De La Fuente, former head of business operations, and Rohit Sabhlok, former director overseeing trading infrastructure, joined Celsius in February and September 2021 respectively. It was early enough to enjoy the excesses of the last crypto bull market but too late to fix what they describe as structural problems that contributed to the firm’s collapse in June.
They believe many of those issues are still rife in the sector, and point to the recent collapse of Sam Bankman-Fried’s crypto exchange FTX as evidence. When it comes to corporate governance — keeping track of customer funds and recording transactions — many crypto firms are just not up to scratch, they told Financial News.
“We simply don’t have the ecosystem of partners and providers available to enable us to do those jobs,” said De La Fuente. “It’s human sweat and Google Sheets all the way down – whether you’re a giant exchange or a startup.”
“For most people in traditional finance, that would be shocking,” added Sabhlok. “But it is still just technology to [people in crypto]. They haven’t lifted up a layer to corporate governance, legal entities and accounting. They don’t have that language yet.”
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A recent interim report from law firm Jenner & Block, who is the examiner in Celsius’ bankruptcy case, would appear to support the claim.
Celsius tracked its crypto using a Google Sheet spreadsheet titled the “Freeze Report”, the document says, while the company’s Custody product, which launched in April 2022, used manual reconciliation rather than a software solution.
An initial bankruptcy report into FTX paints an even worse picture, with rescue boss John J Ray III writing: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information.” Ray also handled the administration process of Enron.
“The fundamentals of the blockchain and our internal accounting were not reconciled [at Celsius]. We were trying to fix those,” said Sabhlok, a former senior manager for PwC who worked on the firm’s handling of Lehman Brothers’ administration and crisis management at Northern Rock during the financial crisis.
The former directors hope to address the issue by launching their own firm, Chainles. The company will offer a software plug-in designed to improve the quality of financial reporting in the industry.
De La Fuente — a former Citi analyst-turned-management consultant — is chief executive at the startup, while Sabhlok is a co-founder.
Their venture is currently still in the recruitment phase, with an advert recently placed for a chief financial officer.
The irony of two former Celsius directors launching a crypto bookkeeping firm will not be lost on many – but the pair say they are well positioned with significant experience in traditional finance.
“Chasing growth meant that controls were not built fast enough. Many lessons were learned during that, and that’s what we’ve taken into the new firm,” Sabhlok said.
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The pair bemoan a lack of traditional finance experience as another issue dogging the sector. Had crypto firms like Celsius and FTX put more emphasis on hiring “tradfi historians” – people who worked through the hedge fund boom in the 1990s, for example, or the financial crisis in 2008 – they might have foreseen and averted disaster, said De La Fuente.
“You need people who have experience, basically,” Sabhlok added.
Crypto firms like Binance and Coinbase have already started hiring lawyers, compliance officers and bankers from traditional finance space, but it is not enough, the pair said.
Moreover, many digital assets firms have also been forced to freeze hiring following a market crash in the second quarter of 2022 that has already claimed the scalps of Celsius, FTX, hedge fund ThreeArrowsCapital, Voyager Digital, and others. Most recently, crypto exchange BlockFi filed for Chapter 11 bankruptcy in the US.
“Crypto bros don’t understand the basics of how tradfi deals with trading, how it deals with reporting or how it has solved a number of problems in 300 years that they think they don’t have to solve,” Sabhlok said.
“We said this to the leadership lots of times. But what did they chase? They chased growth and didn’t build controls fast enough,” he added.
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Celsius’ former chief executive Alex Mashinsky pursued a string of costly ventures such as its custody business and a crypto mining operation, which it spent more than $40m on in the first two weeks of its bankruptcy in a bet that the startup would raise extra cash.
“When we suggested that we needed to adopt a different model… they said very clearly no, because it was a loss leader,” he said. “What we’re saying is we just need to grow the f*** up. People need to start building for something other than growth.”
Nonetheless, they added that hiring bankers and accountants will not serve as a silver bullet, because much of the technology needed to solve their book-keeping problems “hasn’t been built yet”.
Sabhlok said that at a traditional financial institution if something goes wrong, “I raise it to committee, there’s a big long conversation and someone goes and fixes it.”
That does not work at crypto firms, because of the complexities of applying similar principles to decentralised finance and blockchain-based applications.
De La Fuente said: “There’s no happy ending here. There’s no knight in shining armour coming to save this industry. There’s no easy way out. This industry will have to build its way out of these problems.”
To contact the author of this story with feedback or news, email Alex Daniel