The liquidation trust for cryptocurrency lender Cred filed a lawsuit against Uphold on Friday, alleging that the crypto exchange was behind the product that caused Cred to file for bankruptcy in 2020.
CredEarn, the product, offered high yields to retail investors until Cred’s investments with depositor money soured.
Although not as well-known, Cred’s bankruptcy case bears several similarities to that of Celsius and Voyager, two crypto investment platforms that filed for Chapter 11 bankruptcy protection earlier this month. The drama surrounding Cred’s bankruptcy – who is to blame, whether and how depositors will be repaid – may provide insight into how these more recent cases will unfold.
The Cred case also serves as a reminder that for years, centralized financial intermediaries have used flashy marketing and seemingly too-good-to-be-true promises of high-interest rates to entice investors into the “decentralized” world of cryptocurrency. The risks of what one might call CeDeFi – centralized decentralized finance – have been laid bare for consumers (and regulators) to see in recent months.
In the case filed in the United States Bankruptcy Court for the District of Delaware, Cred’s liquidators are seeking at least $783 million in damages.
Uphold lawsuit
Cred and Uphold created and promoted CredEarn, through which Cred loaned out more than $100 million in customer deposits before failing in 2020, according to Cred Inc. Liquidation Trust.
Those cryptocurrency investments, the majority of which were channeled to the lender via Uphold’s exchange, would have been worth more than $700 million at the peak of the cryptocurrency market.
According to the lawsuit, Uphold induced thousands of retail customers to lend cryptocurrency to the CredEarn program by falsely marketing it as ‘safe, ‘secured,’ ‘insured,’ and ‘fully hedged.’
Cred’s founder, Dan Schatt, was a member of Uphold’s Board of Directors, according to the Cred Liquidation Trust. According to the lawsuit, CredEarn was previously known as UpholdEarn. According to the lawsuit, it was renamed to avoid regulatory risk.
The suit states that Uphold was aware that Cred was implementing a highly risky hedging strategy, and that there was regulatory risk associated with cryptocurrency yield earning programs. Instead of taking on all of these risks, Uphold and Schatt decided to shift the risks away from Uphold by running [‘Earn’] through Cred.
In a statement, Uphold disputed the lawsuit’s claims. Uphold insisted that Cred was completely independently owned and operated and that it was unaware of CredEarn’s financial difficulties when it promoted the product to Uphold customers.
Schatt did not respond to requests for comment from CoinDesk.
Similarities to Celsius
Cred was similar in many ways to Celsius, the crypto lending firm (and former Cred competitor) that declared bankruptcy earlier this month after promising depositors market-leading returns in exchange for their investments. Cred and Celsius both re-invested customer funds behind the scenes to maintain these high yields. They used the interest from these investments to repay depositors while also saving a fee for themselves.
When these investments went bad, customers’ money was at stake.
In Cred’s case, the lawsuit filed on Friday states that more than 90% of the cryptocurrency that Uphold’s customers lent to Cred was then loaned to MoKredit, a Chinese micro-lending firm. CredEarn ran into trouble when MoKredit was unable to repay its loans, as CoinDesk reported at the time.
Celsius’s failure was caused in part by a loan it made to Three Arrows Capital, a major crypto hedge fund that declared bankruptcy in July. Celsius was also heavily invested in Terra, the stablecoin ecosystem that collapsed in May, precipitating the overall crypto crash.
It is unclear whether depositors will be able to recover any of their funds in either Cred’s or Celsius’ cases.
Similarities to Voyager
In addition to Celsius, the Cred saga is similar to Voyager, another cryptocurrency exchange that declared bankruptcy earlier this month. In all three cases, the question is whether customers were misled about the safety of their deposits.
Voyager has been chastised for misleadingly implying that customer deposits were FDIC-insured. The bank where Voyager kept customer deposits in US dollars was insured. Voyager was not one of them. The claims have prompted an FDIC investigation, as well as angry posts on Voyager’s Reddit page from customers who have been unable to withdraw their funds.
According to the lawsuit filed on Friday, Cred customers were similarly misled by marketing implying that their investments were insured: According to a joint press release issued by Uphold and Cred, Cred was a licensed lender with ‘comprehensive insurance…’ Cred and Uphold both approved and disseminated additional marketing materials that falsely claimed Cred had comprehensive insurance and security policies to safeguard your digital assets and data… All of these claims about Cred’s insurance were false.
Cred maintained a small amount of basic business insurance, according to the Cred Liquidation Trust. However, neither the CredEarn nor the CredBorrow programs were insured.
