Fraudulent Bitcoin Transfer Alleged in Cred Bankruptcy Case

When crypto lending platform Cred filed for bankruptcy in November 2020 with up to $500 million in liabilities, the company primarily blamed alleged fraud by an outside investment manager entrusted with 800 BTC.

Former employees also said the company was hurt by the souring of a $39 million line of credit that Cred extended to a Chinese lender at the behest of CEO Dan Schatt.

But new court documents filed by the trust representing Cred’s debtors alleges there was also a fraudulent transaction in which Cred paid consultant and “crypto whale” Winslow Carter Strong over 516 bitcoin (worth about $4.8 million at the time of sale and $21 million today) in exchange for an essentially worthless bond.

“It is a fundamental tenet of bankruptcy law that an insolvent company cannot transfer assets in exchange for no value. That is exactly what happened here,” Darren Azman, an attorney at McDermott Will & Emery LLP representing the Cred Liquidation Trust, told CoinDesk in an email. “The Trust has already traced and recovered a significant amount of cryptocurrency for the benefit of creditors and will continue to be aggressive in those efforts””

CoinDesk reached out to Strong for comment but did not receive a response before publication.

Cred began life in 2018 as Libra Credit, established in Singapore by Dan Schatt and Lu Hua. Libra Credit became Cyber Quantum, which conducted an initial coin offering (ICO) in May 2018. The proceeds provided the initial funding for the company that, after an organizational move to the United States, would become Cred.

Cred’s most notable product offering was CredEarn, where customers lent crypto to Cred with the promise of being repaid plus interest in the same type of crypto as the original investment. Cred then loaned the crypto to MoKredit, a Chinese micro-lending platform owned by Cred co-founder Hua. And MoKredit then lent those funds to its own customers, supposedly thousands of gamers who borrowed small amounts at interest rates as high as 35%.

Cred’s dealings with MoKredit were entirely in stablecoin, but Cred’s debts to its CredEarn customers were in cryptocurrencies, leaving the company exposed to crypto price increases.

According to the documents, Strong developed a relationship with Cred in early 2020 as a consultant who would refer wealthy crypto investors to them. Cred execs internally referred to Strong as a “crypto whale” with deep ties to the high net worth crypto community in Puerto Rico.

Cred also approached Strong to invest with CredEarn, and he soon executed an agreement to loan 500 bitcoin to them at an interest rate of 9%.

However, Cred management also approached Strong with a different opportunity the day before the CredEarn agreement was executed – namely, purchasing a bond from Income Opportunities, a company that both Cred and Strong referred to as a “bankruptcy remote entity.”

Strong allegedly knew that Cred was at risk of bankruptcy, partially due to a confidential brief on MoKredit’s business model provided by Cred execs, so he figured the bonds were a better bet than lending money to CredEarn.

Strong wound up purchasing a note from Income Opportunities by transferring the 500 bitcoin he was lending to CredEarn. A few months later, however, in July 2020, after Cred was already on the road to bankruptcy, Cred bought the note back from Strong for roughly 516 bitcoin. And then in November, Cred filed for bankruptcy, leaving most of its investors in the lurch but having compensated one of its high-profile investors and consultants.

The Cred trust is currently investigating Cred’s consultant payments to Strong and the extent of his involvement with the business practices that led to the bankruptcy. The trust also wants information from Strong to help investigate third parties that Strong referred to Cred.