Fraudulent Bitcoin Transfer Alleged in Cred Bankruptcy

UPDATE (Aug. 31, 2024, 23:00 UTC): Updates throughout with comments from Winslow Carter Strong and new information.

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 court documents filed in February 2022 by the trust representing Cred’s debtors alleged 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””

Strong, for his part, said he, too, was a victim of Cred's misconduct, and the court eventually dismissed the creditors' fraudulent transfer charges against him.

Cred’s road to bankruptcy

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.

Enter Strong

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 Luxembourg company that both Cred and Strong referred to as a “bankruptcy remote entity.”

The February 2022 complaint alleges that Strong "was well-aware of Cred’s precarious financial position and ... exposure to MoKredit." It notes that Cred execs provided him with a confidential brief on MoKredit’s business model in January 2020. In the plaintiffs' telling, he figured the bonds were a better bet than lending money to CredEarn.

Strong later called "absurd" any suggestion that he was trying to avoid exposure to MoKredit. Rather, he said he was concentrating it. The Income Opportunities entity, he pointed out in a 2023 email to CoinDesk, was lending 100% of its assets to MoKredit.

His stated intention from the start, he said, was to roll over the loan to Cred into the Luxembourg entity "as soon as it was ready to receive it." Cred had marketed Income Opportunities to Strong as "better-insulated from bankruptcy (which, ironically, turned out to be the exact opposite for me)," he told CoinDesk.

Strong wound up purchasing a note from Income Opportunities by transferring the 500 bitcoin he was lending to CredEarn. A few months later, on July 2, 2020, after Cred was already on the road to bankruptcy, it transferred 516 bitcoin to Strong.

The creditors' complaint characterized this transfer as Cred buying the note from Strong. Strong told CoinDesk it was simply a repayment of funds due with interest. The note agreement, reviewed by CoinDesk, gives a maturity date of June 30, 2020. Strong said he got his money back two days late.

In November 2022, Cred filed for bankruptcy, leaving most of its investors in the lurch but having compensated one of its high-profile investors and consultants.

What happened next

In February 2022 the Cred trust said it was investigating Cred’s consultant payments to Strong and the extent of his involvement with the business practices that led to the bankruptcy. The trust was also seeking information from Strong to help investigate third parties that Strong referred to Cred.

Five months later, the court dismissed two of the five counts against Strong. In February 2023, Strong and the plaintiffs settled the remaining charges. The case was dismissed with prejudice, meaning it can never be reopened.

Strong told CoinDesk he lost more on the settlement and legal fees defending the claim than he made on the loan.

Read more: Bad Loans, Bad Bets, Bad Blood: How Crypto Lender Cred Really Went Bankrupt