Cred’s liquidation trust filed a lawsuit against Uphold on Friday, claiming that the crypto exchange was responsible for the product that ultimately led Cred to file for bankruptcy protection in 2020.
Before the investments Cred made with depositor money went bad, that product, CredEarn, offered small-scale investors significant yields.
Cred’s bankruptcy case is similar to that of Celsius and Voyager, two cryptocurrency investment platforms that filed for Chapter 11 bankruptcy protection this month, although not as well-known. Who is to blame, whether and how depositors are to be reimbursed—all of the drama surrounding Cred’s bankruptcy—could offer insight into how these more recent cases could go.
The Cred case serves as a reminder that centralized financial intermediaries have been luring investors into the “decentralized” realm of cryptocurrencies for years with flashy advertising and what seems to be too good to be true claims of high-interest rates. But unfortunately, the hazards of CeDeFi, or centralized, decentralized finance, have not just recently come to light for consumers’ (and regulators’) eyes.
The complaint was filed in the United States Bankruptcy Court for the District of Delaware, and the liquidators of Cred are requesting at least $783 million in damages.
Uphold lawsuit
CredEarn, through which Cred lent out more than $100 million in client deposits before collapsing in 2020, is said to have been founded and promoted jointly by Cred and Uphold, according to Cred Inc. Liquidation Trust.
Those bitcoin assets, most of which were routed to the lender through Uphold’s exchange, would have been valued at more than $700 million at the height of the cryptocurrency market.
According to the lawsuit, Uphold misrepresented bitcoin lending to the CredEarn program as “safe,” “secure,” “insured,” and “completely hedged,” which led thousands of retail consumers to participate.
The Cred Liquidation Trust uses the fact that Uphold’s Board of Directors included Cred’s founder, Dan Schatt, as proof. The lawsuit asserts that UpholdEarn was originally intended to be the name of CredEarn. According to the lawsuit, it was renamed to reduce regulatory risk.
The lawsuit states that Uphold knew that Cred was using a hazardous hedging approach and that bitcoin yield earning schemes came with regulatory risk. Nevertheless, uphold and Schatt decided to run “Earn” via Cred to move the risks away from Uphold rather than taking on all of these risks.
Uphold refuted the lawsuit’s assertions in a statement. Insisting that Cred was owned and run entirely independently, Uphold said that when it advertised the product to Uphold clients, it was unaware of CredEarn’s financial difficulties.
Inquiries for comment from CoinDesk went unanswered from Schatt.
Parallels with Celsius
Cred had many similarities with Celsius, a cryptocurrency loan company (and former rival of Cred) that declared bankruptcy this month after promising investors market-leading returns in exchange for their investments. Cred and Celsius secretly reinvested consumer funds to keep these high rates. They returned deposits to depositors and deducted a fee for themselves using the interest from these investments.
When these investments turned bad, the customers’ money was at risk.
In the instance of Cred, the complaint filed on Friday states that more than 90% of the bitcoin that Uphold’s clients lent to Cred was afterward given to MoKredit, a Chinese micro-lending company. As CoinDesk noted at the time, CredEarn encountered difficulties when MoKredit could not make loan repayments.
One factor that contributed to Celsius’s demise was a loan it provided to Three Arrows Capital, a significant cryptocurrency hedge fund that declared bankruptcy in July. Additionally, Celsius had a sizable investment in Terra, the stablecoin ecosystem that failed in May and caused a larger crypto catastrophe.
It is yet unknown if depositors in either the CredEarn or Celsius cases would be able to get any of their money back.
Parallels with Voyager
In addition to Celsius, another cryptocurrency exchange that declared bankruptcy this month, Voyager, also has similarities to the Cred tale. There are doubts about whether clients were offered misleading guarantees concerning the security of their money in all three incidents.
Voyager has come under fire for giving a false impression that client deposits were FDIC-insured. Voyager stored customer money in a bank that was insured. The original Voyager wasn’t. The allegations have spurred an FDIC investigation and furious messages on Voyager’s Reddit page from clients who were taken aback by the impossibility of getting their money out.
Customers of Cred were similarly misled by marketing that said their investments were guaranteed, according to Friday’s lawsuit:
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“A joint press release between Uphold and Cred falsely stated that Cred was a licensed lender with ‘comprehensive insurance’… both Cred and Uphold approved of and disseminated other marketing materials that also falsely asserted that Cred had ‘comprehensive insurance and security policies to protect your digital assets and your data… All of these statements concerning Cred’s insurance were false.”
Cred “kept a tiny amount of basic business insurance… but the CredEarn and CredBorrow programs were not covered,” according to the Cred Liquidation Trust.
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