CRED

DESCRIPTION OF EVENTS

"Cred Inc. [was] a centralized cryptocurrency lender." "You don’t have to sell your crypto to cash in on it. Let us put your digital assets to work for you." "Accrue interest regardless of how the market moves. We accept over 15 coins and counting like Bitcoin, XRP, etc. Cred’s insurance coverage is among the most comprehensive in the industry." "We take our cut for insurance, licensing and liquidity, and return the rest to you." "[N]either entity is a bank and no transaction or arrangement provided by either entity is guaranteed or insured by the FDIC or any other governmental entity."

"[C]ryptocurrency wallet and trading platform Uphold terminated its partnership with Cred. Cointelegraph reported that at least one Uphold user had been having technical problems with the platform’s CredEarn program allegedly caused by Cred. Following the dissolution of the Uphold partnership, the user claimed that he had roughly $140,000 in Bitcoin (BTC) and other assets locked in his Cred account."

"Edge integrated the service Cred in [their] application." "Given the custodial nature of the service, Edge went through over a month of due diligence to best understand the product and the team at Cred. [They] met with their leadership team several times both in person and online before feeling comfortable offering their service to our users. Their transparency and known leadership with financial and technology giants like PayPal, Intuit, and Wells Fargo helped gain [Edge's] trust and faith that the [Cred] team had the best intentions with their product and service."

The company "employed UK fugitive and prison escapee James Alexander as the firm’s Chief Capital Officer (CCO)." "On October 27, Cred announced that there had been an incident in the company that negatively affected their balance sheet, including user deposited assets." James Alexander "allowed a significant portion of user deposited funds to be invested [with] a fraudulent asset manager. An asset manager is an entity that provides a yield on lent assets. The asset manager in question was a nonexistent and fraudulent entity." "Cred initiated a federal investigation on this previous staff member and asset manager in an attempt to recover funds. Due to this incident, Cred is no longer able to fulfill its debt to customers." "Cred Inc. filed for bankruptcy in November 2020." "According to court documents, the legal team for Cred CEO Daniel Schatt filed bankruptcy papers for the company in the District of Delaware on Nov. 7."

"In an emailed press release, Cred said Grant Lyon ha[d] been named to the company's board to oversee the restructuring process. It has also hired MACCO Restructuring Group as financial adviser to evaluate M&A and other restructuring opportunities." An "investigation [was conducted] by Delaware bankruptcy court." "March court documents shed light on Alexander’s troubled past, including a three-year prison term for possessing illegal money transfers in the UK. He was later transferred to a facility where he participated in a breakout, leading to his fugitive status. Alexander allegedly funneled over $2 million in both bitcoin and US fiat to his personal accounts."

"Though there were a number of factors leading to Cred’s bankruptcy filing, the platform’s decision to employ UK fugitive James Alexander was a major contributor. CipherTrace supported the investigation by tracing and blocking the flow of bitcoin to James Alexander’s personal accounts, demonstrating the value of blockchain analytics in investigations involving cryptocurrencies."

Back in December, “There’s no evidence that anybody has done anything wrong since the [bankruptcy was filed],” said Paul Hastings LLP partner James Grogan, the attorney representing Cred in the case. “We’re not here to sprinkle holy water on what the debtors did pre-petition. Nobody thinks that this company was well-run or was a model for business schools.”

"In an omnibus preliminary hearing on Friday, Judge John Dorsey of the Delaware Bankruptcy Court rejected a motion to appoint a Chapter 11 trustee to oversee Cred’s restructuring. The judge made the ruling with the caveat that if Cred equity holders Dan Schatt and Lu Hua attempt to fire Cred board member Grant Lyon, who’s in charge of Cred’s restructuring, then the court will step in and appoint a trustee to oversee the bankruptcy. Dorsey also appointed an examiner, who will provide an independent investigation into Cred’s business."

"As set forth in more detail in the Emergency Motion of the Official Committee of Unsecured Creditors (the “Emergency Motion”), filed contemporaneously herewith, the Committee has just been alerted that on January 16, 2021, and January 17, 2021, James Alexander covertly transferred several million dollars’ worth of the Debtors’ cryptocurrency. These transfers were forbidden by a temporary restraining order and preliminary injunction issued by the California state court. Accordingly, the Committee brings the Emergency Motion seeking an order requiring Alexander to post the Debtors’ cryptocurrency in escrow pending the determination of the Adversary Action."

"Unfortunately, this incident makes it unlikely that all users will be able to recover all funds deposited in Cred."

Cred was founded with one executive who had a criminal record. They loaned out user's cryptocurrency without providing users with visibility into how they were invested. Finally, after the company went bankrupt, the court allowed the funds to remain outside of a multi-sig wallet, where the executive with the criminal record decided to attempt to run away with it.

Adding up the claims which were searchable online yielded a total of $330,487,071.79 USD in claims filed up to June 18th, 2021.

HOW COULD THIS HAVE BEEN PREVENTED?

Effectively providing and managing loans without collateral has a high risk of default. When lending crypto-assets, one has to consider the increased risk that the debt will increase in value due to the deflation of the assets. Therefore, we believe that platforms should generally keep full backing of all crypto-assets, and trading platforms should not engage in lending practices.

When funds are stored, they need to be stored in a multi-signature arrangement which prevents any particular entity from transferring them without the approval of others.

It is also a good idea to conduct background checks on all key holders of a wallet.

Check Our Framework For Safe Secure Exchange Platforms

Cryptocurrency Crime and Anti-Money Laundering Report, May 2021 - CipherTrace (May 24)
Cred | The Crypto Financial Platform (Jun 29)
Cred Bankruptcy Court Filings (Jul 1)
Cryptocurrency Lending: Lessons from the Cred Bankruptcy | Guidehouse (Jul 1)
MyCred.io going bankrupt. What happens next? : CryptoCurrency (Jul 1)
Edge | Letter from the CEO Regarding Cred Bankruptcy - Edge (Jul 1)
Cred customers demand answers after platform files for bankruptcy  (Jul 1)
@MattLongest6 Twitter (Jul 1)
Crypto Lender Cred Files for Bankruptcy - CoinDesk (Jul 1)
Here's What Happened at Crypto Lender Cred's Latest Bankruptcy Hearing - CoinDesk (Jul 1)

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