Behind the Shroud of Cred’s Tragic Bankruptcy

Cred rose to fame by enticing retail investors to earn up to 10% on their idle cryptocurrency. It attracted support from influencers like Litecoin’s Charlie Lee, TechCrunch founder Michael Arrington, and NBA superstar Spencer Dinwiddie.

And as interest rates plummeted globally, business boomed. Cred offered people even higher returns on cryptocurrencies that already have the potential to make holders rich overnight.

Now, after a series of multi-million dollar loans, allegedly fraudulent investments, and internal lawsuits, Cred has run out of money. And customers and employees are left with more questions than answers.

This is the inside story of Cred’s tragic fall.

Red Flags All the Way Down

“I’m on my way up to the mountains just now, so I have plenty of time to talk,” Daniyal Inamullah, Cred’s former Head of Capital Markets, told Crypto Briefing in a phone call. 

He had just left the company by choice. After months of confusion ending in Cred’s abrupt bankruptcy filing, Inamullah has finally earned some time off. 

Inamullah was eager to lay out the various missteps leading up to Cred’s bankruptcy this week. Others were, however, much more fearful to comment.

One source told Crypto Briefing that Dan Schatt, the company’s CEO, was “litigation-happy.” Another three reported similar concerns, worrying that talking to the press could lead to a costly court battle. 

Crypto Briefing reached out to Schatt by email and has yet to receive a response.

Still, with thousands of customers left out to dry and $140 million in lost assets, sources who came forward all painted the same picture⁠—Cred’s implosion has been a long time coming. 

And Inamullah felt it was finally time to speak up.

“I joined in January this year after Dan convinced me that he knew exactly what he was doing,” Inamullah said. “And even when I raised some red flags, Dan assured me that everything was going to be fine.”

However, understanding the first red flag means going back to the beginning of 2019 when Cred began loaning a total of $39 million to a company called moKredit. This loan was secured via moKredit’s assets.

Chinese Gamers Owe Cred $39 Million  Beginning of 2019 to Mar. 2020

Dan Schatt and another ex-PayPal employee named Lu Hua founded Cred in 2017. By early 2020, however, Hua had ceded almost all operational control of the company to Schatt. 

It was unclear the nature of this change, but two sources remember Hua becoming less and less the face of Cred’s leadership. These same sources told Crypto Briefing that there was no formal declaration about his separation from Cred.

Inamullah said that Hua left Cred to focus his time building a similar, China-based lending service called moKredit. 

According to the bankruptcy filing, moKredit “provides alternative payment services to online gaming publisher sites through the provision of credit (in the form of gaming tokens) to video game enthusiasts.” 

And to assist Hua with the venture and create another revenue stream for Cred, Schatt lent “most of their cryptocurrency assets” to moKredit. The total amounted to $39 million and allegedly generated between 15% to 24% in annual interest for Cred. 

This revenue stream quickly dried up as the COVID-19 crisis unfolded, according to Inamullah. 

“Chinese regulators essentially told citizens that they could pause any unsecured loan reopayments they were engaged with,” he said. “This meant that moKredit had no liquidity for their loans and thus Cred fell into a liquidity trap. It created a ripple effect.”

The debt delay program was set in place shortly after the frightening economic crash in March 2020. In one day, Bitcoin plummeted over 50%, its second-largest drop in history, following a crash in traditional markets in what many now call “Black Thursday.” 

Thus, with BTC reserves dwindling and a liquidity source eliminated, Cred quickly found itself hemorrhaging cash. To help keep the company afloat, Hua gave Cred a loan of 300 Bitcoin, roughly $4 million at today’s prices. There was no formal agreement behind the loan. It was simply given from Hua to Cred. 

Inamullah also indicated that Cred was paying interest on this personal loan with corporate and customer assets.

Despite the amount of money passed between both firms, there is little information on the Chinese company available in English.

Company info on moKredit (mo9) gathered from an electronic records app called Tianyancha.

Of the various moKredit employees contacted, including co-founder Allen Cheung, none have responded for comment. When following links to the company’s homepage, the site is also down. 

It is possible, however, to inspect the company’s short Crunchbase profile. 

It lists Hua and Cheung as founders and includes Sequoia Capital, a notable crypto hedge fund, as key investing partners. Sequoia Capital has not listed moKredit as one of its investments.

Technode, a publication focused on the Chinese tech scene, wrote that it is a “credit service provider” for the gaming industry. 

They wrote,

“Essentially a mobile payments service, [moKredit] allows gamers to ‘play now, pay later.’ As [moKredit] expands in further areas, it will enable users to ‘watch/read/listen now, pay later’ as well as to ‘buy now, pay later.’”

Cred’s $39 million loan thus allowed Chinese gaming enthusiasts to play video games on credit. 

According to Cred’s bankruptcy filing, the company allegedly renegotiated the repayment schedule with moKredit. Under the new schedule, moKredit “continued to make payment of interest with a small amount of principal repayment.”

That is, at least, Cred’s side of the story. 

Crypto Briefing received an email from a group made up of both current and ex-employees at Cred that tells an entirely different story. 

The group goes by the name of the “ExCredCrew” and used a ProtonMail email account to ensure their anonymity. Inamullah confirmed that some of the email’s authors were authentic and that the details included were true. 

According to the email Crypto Briefing received, “there was never a renegotiated repayment schedule that was agreed to by Cred’s investment committee.” Schatt allegedly put moKredit “on a long leash,” effectively allowing them to send back whatever they wanted when they wanted. 

As the senior lender, Cred did not attempt to recoup on these funds, and the investment committee’s requests were consistently “rejected by the CEO.”

The investment committee was made up of Dan Schatt, Daniel Wheeler, James Alexander, Heidi Nguyen, and Inamullah. 

Enter James Alexander, Stage Left Feb. 2020 to Oct. 2020

In February 2020, Cred also invested in a management company called Quantcoin, according to the company’s bankruptcy filing. Inamullah and three other sources confirmed this investment with Crypto Briefing. 

James Alexander, the former Chief Capital Officer at Cred, was charged with managing the investment. The documents indicate that Alexander even informed Cred of a “potential investment opportunity.”

Inamullah also told Crypto Briefing that Alexander was also responsible for hiring him in January 2020.

After due diligence and approval from the company’s investment committee, which included Schatt, Alexander was then granted permission to invest 800 Bitcoin of Cred’s funds into Quantcoin in February 2020. This sum is now worth roughly $12 million at current prices.

Following the initial investment, an alleged Kingdom Trust employee named Scott Foster provided Cred with monthly updates on the investment status. Kingdom Trust is a crypto-specific custodial service meant for institutional investors. In this arrangement, Foster behaved as the administrator between Cred and its investment in Quantcoin.

But when Cred attempted to recoup on their investment following the six-month lock-up period, the company had vanished. When the company contacted Kingdom Trust to discuss the withdrawal, Kingdom Trust reported no open accounts with Cred. 

And though Kingdom Trust had employed Scott Foster, the contact information that Cred had for Foster was fake.

“Everything went silent. No responses to emails or phone calls” said Inamullah. “So, we went directly to the authorities.”

One source said that Schatt had described the scheme as “highly-sophisticated.” This announcement was made to Cred employees in October, but the c-suite was aware of the incident in August.  From when the fraud was discovered in August to notifying the team, Schatt reminded employees that they should continue to add more clients to offset the loss in assets. 

Employees, however, were unaware of the fraud at this time.

Following the fraud’s announcement, Cred froze assets on its site and fired three employees almost immediately. Inamullah told Crypto Briefing that these employees were given two weeks severance. Cred even withheld their earned commissions for all of the third quarter, one source confirmed.

Though a hefty sum, $12 million still doesn’t seem like enough to bankrupt a company with $140 million in assets, as Cred claimed in the filings. This is because additional losses were left out of Schatt’s filing.

According to the email from the ExCredCrew, Schatt omitted a specific loss in the bankruptcy filings that is alleged to be “even greater than the James Alexander and Quantcoin situations combined.”

Cred’s C-Suite Chaos Jul. 2020 to Nov. 2020

In July 2020, Schatt fired Alexander. 

Alexander then filed a lawsuit against Schatt seeking declaratory relief and claiming breach of oral contract, conversion, and intentional interference with $1 million in lost business opportunities. 

The dispute between Alexander and Schatt concerns the incorporation of Cred Capital, a separate legal entity allegedly established to help arrange bond offerings and oversee crypto asset management.

Alexander claims that Cred Capital was formed under the oral and written agreements between him and Schatt. According to these, Cred Capital was purposefully structured to operate autonomously.

In a counter lawsuit filed roughly two weeks later, Cred claimed the opposite. 

The company accused Alexander of conversion, breach of employment contract, breach of the implied covenant of good faith and fair dealing, and breach of the fiduciary duty of loyalty.

Cred claims that Cred Capital was established to “create a clear division of legal and regulatory responsibilities, where Cred operated as a lender, while Cred Capital operated as an asset manager and securitization provider for Cred.”

Furthermore, Cred accused Alexander of stealing over $2 million worth of Bitcoin and USDC—money he allegedly took from the company and transferred to his own wallet. This accusation and suspected theft are what the ExCredCrew referred to above as the “James Alexander situation.”

What’s Next for Depositors? Nov. 2020 to Present

Due to these events, Cred was forced to file for bankruptcy, according to Schatt. 

Two former employees told Crypto Briefing that they first learned of the news from customers rather than the company’s CEO, Dan Schatt. 

Moreover, many employees were personally invested in the company, storing their crypto and fiat for high returns. One source said that a month before the bankruptcy news, they had convinced their mother to join the platform. 

Affected users have gathered throughout the internet in the thousands. Over 400 have erected an outpost on Telegram, sharing their losses and searching for answers.

One user told Crypto Briefing that they lost $400,000 in BTC and ETH on the platform. Another said, “36 years of saving for retirement. Gone.” 

The bankruptcy case has only begun, too, with the initial hearing occurring on Nov. 10 at 20:00 UTC. Here, Schatt explained why the company was making the filing. 

Schatt presented his filing to Judge John T. Dorsey of the Delaware Bankruptcy Court. The case filing is 20-12836.

Filing a case under Chapter 11 of the bankruptcy code means that Cred seeks to “reorganize” the business to resume operations and become profitable again. 

To get relief under Chapter 11, Cred has produced a reorganization plan and seeks confirmation from the court. The court can either approve the reorganization plan or dismiss Cred’s case and convert it to Chapter 7.

Chapter 7 is known as “liquidation bankruptcy.” In that case, Cred would have to stop all operations and completely go out of business. The court would then appoint a trustee to liquidate the company’s assets and use the money to pay off outstanding debt to creditors. 

Under Chapter 7 bankruptcy, investors who took the least risk, such as secured creditors, are paid first. Unsecured creditors, which represent the majority of Cred’s users, have the next claim. Stockholders or owners of the company are paid last. 

The final group may not receive anything if the secured and unsecured creditors’ claims are not fully repaid. The best-case scenario for Cred customers is for the company to stay afloat and pay off creditors over time, as per the reorganization plan. In this case, the Chapter 11 filing may very well be for the best.

Under Chapter 11, the “debtor in possession” or Cred will keep running the day-to-day business operations. Still, all significant business decisions will have to be approved by the bankruptcy court.

Two Steps Forward, One Step Back

Mainstream financial publications like Bloomberg and The Wall Street Journal were quick to pick up news of yet another crypto scam. And for many veteran users, the events at Cred reminded of the various scandals of 2017. 

Indeed, Cred’s bankruptcy may have cost crypto much more than millions of dollars.

The CEO of Celsius, Alex Mashinsky, told Crypto Briefing that, “If we want our industry to grow we need to continuously make trust deposits with the community if we want them to make coin deposits with us.”

Many Celsius users are now asking similar questions about the company’s financials. Elsewhere, BlockFi, Crypto.com, Blockchain.com, Nexo, and many other lending and borrowing services have also come under scrutiny. And rightfully so. 

If crypto is ever expected to reach mainstream adoption, it must first outgrow its Wild West roots. This process will take time, of course. But it’s not impossible. The fruits of the internet never fully arrived until some 30 years after its creation.

Lest we forget, Bitcoin has only been around for 12 years and has a market cap 85 times smaller than Apple. 

There’s still a long way to go.

Disclosure: Cred was once an advertiser on Crypto Briefing. We no longer have any relationship with Cred or any of its affiliates.