Celsius' Mashinsky has been arrested- but this doesn't change anything.

Last week, Celsius customers received some long-awaited good news- the company’s co-founder and former CEO Alex Mashinsky was arrested.

According to the US attorney’s office in Manhattan, Mashinsky is being charged with seven criminal counts, including securities, commodities and wire fraud.

Mashinsky has pled not guilty to any of the charges, and is free on a US$40 million bond.

A recap of the celsius drama so far

Celsius, a crypto lending platform, was founded in 2017 by Alex Mashinsky, Daniel Leon, and Nuke Goldstein.

The platform allowed users to deposit their crypto on the platform in order to earn interest, while also offering cryptocurrency loans to others. Celsius’ terms seemed great for depositors.

During the bull market of 2022, Celsius also deposited cryptocurrencies into other DeFi protocols such as Anchor, since Anchor actually offered higher interest rates.

But, as we know, the collapse of the Terra-Luna ecosystem meant that anyone who was involved in the system, including those who were staking tokens on Anchor protocol lost everything.

Celsius was no different, and the crash left a billion-dollar hole in Celsius’ balance sheet.

By June, the company was forced to halt withdrawals, and demanded that borrowers on the platform top up their collateral or be liquidated.

These measures, however, did not help the company, and Celsius eventually filed for bankruptcy.

A month later, executives unveiled a plan to revive the company, by investing in cryptocurrency mining rigs and generating revenue through crypto mining- something that none too many creditors were willing to back.

Soon after, Mashinsky resigned and went dark.

A history of power imbalance and abuse

Mashinsky’s story is a cautionary tale- it shows what can happen when companies are free to act without regulatory oversight.

As a centralised organisation, Celsius was able to take advantage of the fundamental power imbalance that existed between itself and its customers, both depositors and borrowers.

While it was Celsius that made the mistake of investing large amounts of money into Anchor, it was ultimately customers who paid the price when Celsius forced them to top up their collateral, forced them to accept a foolish recovery plan, and forced them to wait for their money.

Celsius was able to repeatedly do as they wish, and effectively bully their customers into accepting fait accompli after fait accompli because there was no one who could compel them to do otherwise.

It would be bad enough if Celsius was an outlier in the crypto world. Unfortunately, this does not seem to be the case. On the contrary, the crypto world seems to be rampant with abuses of power, with everyday consumers being made victims either intentionally or unintentionally.

There are plenty of stories of people getting rugged by seemingly legitimate companies, or being targeted for scams and other forms of crypto crime. Individuals who have little recourse or option but to swallow the loss themselves often end up on the losing end, as organised criminal syndicates become more and more sophisticated.

Even projects that begin legitimately can end up bullying their customers when times get tough.

Last year, in the wake of the Terra-Luna crash, Do Kwon attempted to revive the project, and put up a proposal to restart the blockchain, but without the Terra stablecoin. The vote itself passed, but there were accusations of an unfair vote. After all, Do Kwon’s Luna Foundation Guard itself controlled around 60 per cent of the votes. Any proposal that they did not support would fail, and any proposal that they did was almost certain to pass.

It’s not clear to what extent Do Kwon and the Luna Foundation Guard actually rigged the vote and strong-armed the proposal through, but that is besides the point- the point is that despite claiming that the ecosystem was decentralised, significant power still remained centralised around Do Kwon and the Luna Foundation Guard.

Why do these incidents happen?

Of course, it is easy to say that Do Kwon and Mashinsky and many others were simply evil and took advantage of everyone else’s trust.

But this argument gets us nowhere. Is it possible to prove that these people were acting in bad faith, and were out to scam people from the start?

Instead, we should consider something more fundamental- the power imbalance between corporations and consumers.

What allowed such egregious abuses of power to occur was the fact that consumers have limited options when it comes to dealing with companies, especially large companies like Terraform Labs and Celsius.

And in a decentralised world where companies do not have anyone to keep them in line, this problem becomes much more pronounced.

Is decentralisation dead?

As we have seen, decentralisation is a problem in the crypto world- because much of the crypto space evolved in a way to circumvent or avoid regulation, the power imbalance between companies and consumers is more keenly felt.

Completely banning centralised entities from the crypto space is not going to be helpful either, especially since we cannot guarantee that all actors within the space act in good faith.

When everything is decentralised, the incentive to accumulate power and centralise is at its greatest, and we can only enforce so many rules on our own.

Yet, the alternative is for consumers to align themselves with other centralised organisations, such as regulators, and empower them to look after our interests on our behalf.

And this is where the catch-22 of the crypto world is found. Without regulatory oversight, consumers may not always be aware of what companies are legitimate, and must rely on trust. But, inviting regulators into the space will, for many people, defeat the purpose of crypto in the first place.

This is not a problem that is easy to solve, nor is it likely to be solved. Whether the crypto space needs regulation, and what type of regulation, has been a hot topic of debate over the past few years.

And until the question is put to rest, at least with widely accepted principles and some form of effective enforcement, Celsius will not be the last company to abuse their power.

Mashinsky’s arrest is a sign that action will be taken- but it does not solve the problem of decentralisation and abuse of power. And nothing will change until steps are taken to solve it.