Two of the three major CeFi platforms have gone bankrupt and liquidated, leaving only Nexo with $2 billion in assets. After the FTX thunderstorm, the dark clouds extended to many platforms, and Genesis, BlockFi, etc. were in emergency; Celsius, one of the three major CeFIs, had gone bankrupt and liquidated during the last round of Luna thunderstorms. Since 2022, 80% of the market value of Nexo’s token NEXO has evaporated.
Questions about Nexo’s liquidity gradually began to emerge on Twitter. Looking at Nexo's Twitter before the end of November, most of the comments below are the voices of doubts from Twitter users or the customer service needs of Nexo platform users, reflecting certain technical loopholes. The Nexo token continued to fall in the seven days before December 1st, and then increased significantly after December 01st, with the latest reported increase of 9.16%. There has been no Nexo available for short selling on Binance in recent days.
In order to combat short selling, Nexo posted a long list of profit models and multiple tweets on Twitter on November 29 to explain its operating mode and various financial terms. It reiterated that it has no exposure to BlockFi and Genesis and does not provide unsecured loans. , there is no asset-liability mismatch that has been questioned by users of the other two major CeFis, and they emphasized that they will launch reserve certificates. Its auditor, the American company Armanino, also issued an audit report. After investigating Nexo's wallet address, identifying platform assets, and understanding platform liabilities through API, it issued an audit opinion stating that the value of Nexo's US dollar assets is greater than its liabilities. Then on November 30, Nexo announced that it had obtained relevant Italian licenses to provide financial services in Italy and promoted its entry into the first-tier market. A day later, Nexo released another message supporting Pancake.
Despite the overall market downturn, Nexo is still expanding aggressively. It previously submitted a letter of intent to the canton of Zug in May to purchase the assets of Celsius, and in June purchased Vauld, a lending platform founded by Peter Thiel and Coinbase Venture that was on the verge of liquidation. Currently, even though the two major CeFi companies have closed down, Nexo is still expanding its products and recruiting people.
This series of actions seems to tell users that Nexo has abundant assets, abundant liquidity, and full potential for corporate development. But is this really the case?
Introducing Nexo - Is a purchased banking license reliable? Legal may not necessarily be useful
Nexo’s official website states that it is an electronic asset platform (digital asset platform), and its parent company’s network information indicates that it is registered at Grafenaustrasse 15, Zug, Switzerland. The state has gathered a large number of cryptocurrency companies due to its loose tax policies and encryption regulations, so it is not Not surprisingly. But Nexo does not have a Swiss banking license. According to information from the website nexo.how, which is not directly tied to Nexo, Nexo is promoted (“powered by”) by Credissimo, a FinTech company founded in Bulgaria in 2007 that focuses on providing financial lending services. It aims to leverage the value of $4 Trillion cryptocurrency lending market. Nexo was founded in Bulgaria in 2018 but later moved to Zug. The nationalities of Nexo’s founders Antoni Trenchev, Kosta Kantchev and Kalin Metodiev are unknown, but according to LinkedIn history, all three of them have grown up and worked in Bulgaria or Bulgarian-related companies. Among them, Kalin Metodiev is the chairman of the Bulgarian CFA Association and holds a certificate. , Kosta Kantchev is the founder of Credissimo.
Nexo has a wide range of businesses and has no shortage of users in the United States through a series of bank acquisitions in the United States. Currently, Nexo has money transfer licenses in many states in the United States, such as Arizona, Alabama, and Kansas, and can legally operate financial services. It has lenders' licenses in Oklahoma, New Hampshire, Wyoming, and other states, and can borrow money. business. Having the right to operate financial services does not mean that the funds are government insured. In September 2022, Nexo took a stake in Hulett Bancorp of Wyoming, which is regulated by the U.S. federal government. The company has a small bank, Summit National Bank, which is a member of the Federal Deposit Insurance Corporation (FDIC) and is protected by the deposit guarantee of the U.S. government. In Wyoming, There are 4 outlets in Idaho and Montana. Nexo said the investment could expand its U.S. operations, which it did not disclose. Despite this, a few months later, on December 6, Nexo stated that it would gradually cease its products and services in the United States in the next few months. Earlier in September, eight states in the United States sued Nexo (estate administration lawsuit), claiming that products that earn interest should be registered as securities (security). Nexo blames these regulators for its strategic U-turn in the United States, saying that the regulatory conditions in the United States are still very immature and unclear, even though U.S. encryption supervision is no longer a black zone in many major countries and regions.
If after the United States leaves in a few months, most of the licenses on Nexo’s official website are American, then under what identity will Nexo carry out financial services?
Nexo's license in Switzerland is "SO-FIT" of the Canton of Geneva, a non-profit organization that carries out self-regulation (autorgulation) under the supervision of the Swiss Financial Management Authority. Members participating in SO-FIT need to consciously maintain industry standards and use qualified auditors , combating money laundering and financial crimes, etc. At present, we can see a series of calls for industry standards, but if it is violated, the consequences are unknown.
Although the overall compliance of the encryption industry is not strong, Nexo has always been proud of its compliance in publicity. The various financial-related operating licenses collected by Nexo in the United States can also prove its strategy and strategy of conducting financial services as legally as possible. Implementation modalities. However, this compliance only indicates operational compliance and does not mean that assets are guaranteed. BlockFi, which went bankrupt before, also pointed out in its disclaimer that BIA does not belong to a bank and will not be subject to regulatory protection. It also said that BlockFi is very "compliant" in many ways, but in the end it still could not escape the outcome of bankruptcy.
As a moneylender, Nexo prides itself on the guarantees on its moneylending mortgages. Nexo said on Twitter that it refuses to issue loans without collateral or with insufficient collateral assets. Its money lending has always been focused on automated mortgage credit (original word focus on), and will automatically liquidate user collateral when the LTV exceeds the risk value (automatic liquidation is also controversial, involving ownership of collateral). Nexo can currently mortgage 60+ cryptocurrencies and obtain 40+ fiat currency options. Nexo also supports the most crypto and fiat currencies among the three major CeFis in the past. The LTV of Bitcoin and Ethereum is 50%, and the LTV of Nexo’s token NEXO is 15%. However, Nexo stated on Twitter that it has "never" used NEXO as collateral and will not lend NEXO. To this end, Nexo explains that the existence of NEXO is similar to BNB. As an ecological token, it can give platform users the best experience.
Nexo’s official website states that users who hold NEXO can earn at least 1 NEXO per day by participating in the Nexo Earn Product project, and can earn up to 12% APY with daily compound interest. This product is not available to users in Bulgaria, Estonia, or the United States (it’s worth pondering here too). In order to ensure such a high APR, Celsius has taken risks many times before and participated in high-risk projects, resulting in heavy losses. BlockFi even misappropriated user funds to provide its own mining services. In the end, due to the decline in asset value, there was a mismatch between asset value and liabilities.
In order to participate in normal financial operations, it is not uncommon for CeFi lenders to have a license. However, the "compliance" of the license is more or less conscious. Even in the United States before the 2008 financial crisis, due to the regulatory and backward operation methods of the US government, Before the crisis, although banks acted "in accordance with the law," this did not prevent the growth of shadow banking and subprime mortgages. Therefore, the license can only prove the legality of the operation, but cannot prove the rationality of the operation of a private company, especially when most of Nexo's current licenses still rely on conscious supervision.
Insurance and Platforms - Is real-time audit reliable?
Since Nexo itself does not have a banking license, it is not a custodian bank (custodians). The assets stored in Nexo are hosted by a third-party custody platform. Nexo has $775 million in insurance from crypto service providers BitGo, Ledger, bakkt, Fireblocks and others, which are underwritten by London-based Lloyds Bank and Marsh & Arch. Ledger was previously involved in a hacking scandal in 2020 and user data was leaked. Ledger stated that it would not compensate but work hard to strengthen financial security. In the traditional mutual fund industry, if a mutual fund company goes bankrupt, the custodian bank returns the assets held in custody to shareholders. In the encryption industry, it is difficult to say whether the risk is "micro-pru" (micro-pru) or "macro-pru" (macro-pru). It has not yet been disclosed whether the custody funds are in the form of volatile cryptocurrencies or converted fiat currencies.
In addition to this, Armanino provides real-time PoR auditing. As of press time, Nexo has a debt of 154,634 Bitcoins. The company's books are over-collateralized and there is no other information. Armanino is an independent company under Moore North America. Independent companies operate independently and membership does not mean direct cooperation. Armanino provides audit reports for a number of encryption companies and publishes real-time asset changes of clients through its real-time viewable window TrustExplorer. Users can see real-time changes in the dollar value of assets and liabilities on the website. Armanino is also a partner of the stablecoin TrueCurrencies, providing real-time auditing of TrueUSD, TrueHKD, etc.
Real-time PoR cannot prove a company's asset liquidity, or even whether the company has so many assets. The existence of PoR seems to give users a reassurance, but the effectiveness of this reassurance is not necessarily scientific and reasonable. The author has previously written an article analyzing stablecoin auditing "What can we observe from the USDT five-year audit report?" 》, except for algorithmic stablecoins, most of the leading stablecoins will publish PoR audit reports monthly or in real time to prove the value of their book assets. However, with the exception of Tether, other fiat currency stablecoin companies have not released details of U.S. dollar assets. Tether's books show that most of its assets are highly liquid U.S. bonds, cash, etc., with investment corporate bonds and other metals and electronic asset investments accounting for only a small part. This ensures that when Tether suffers a run, it can mobilize liquidity in a short period of time and confirm that its funds are smooth. The dollar value, which other companies don't disclose in detail, can even be property. Although the value of the U.S. dollar is still very high and it is still capable of covering debts on paper, real estate has extremely poor liquidity compared to U.S. debt and cash. Once a run occurs, the company will face a liquidity crunch and can only borrow debt or declare bankruptcy. During the 2008 financial crisis, it was not that banks did not have enough assets. It was just that when subprime mortgages collapsed, the assets held by banks were mortgage properties, not highly liquid assets. The same thing can be said for cryptocurrencies, where the asset value cannot prove the liquidity of the asset class. This is evident in the bankruptcy case of FTX. Many of FTX's assets were illiquid FTTs, which eventually led to the selling of FTTs during a run, and then a vicious cycle of liquidity crunch occurred.
Currently, according to the loan-to-value ratios of various currencies (the value ratio of loans and collateral) published on the Nexo website, the company's books are more likely to be cryptocurrencies with relatively high liquidity.
In addition, Armanino’s real-time information is a scheduled screenshot of the amount on the company’s user account. However, if the company replenishes the user's account balance through borrowing when Armanino takes the screenshot, Armanino will still publish a PoR visible on the webpage to prove that the company has the assets it needs, regardless of the form in which the assets are accounted for.
Summary: Don’t be afraid of not having an asset, just be afraid that the asset class is not flowing.
Nexo’s executives have decades of hard finance and financial technology backgrounds and are licensed to operate, so they should be more experienced in how to avoid liquidity risks that are common in financial history. Nexo’s series of licenses and tweets from time to time clarifying risks and exposures on Twitter also reflect Nexo’s external risk control caliber.
According to information posted on Nexo's Twitter, the company is undoubtedly "lucky" and has avoided being hit by multiple thunderstorms. The company also reiterated its support for companies and mines hit by previous thunderstorms in an article published on November 28. The market does not lend money and does not provide unsecured loans to crypto asset managers. Traditional banks were required to conduct sensitivity tests after the 2008 financial crisis, which tested the bank's ability to withstand stress in the event of an extreme bank run. Nexo said that it also has an internal system to test the short-term liquidation of collateral under extreme circumstances, and has not lost a single dollar so far.
Maybe Nexo is right, but given that the current documents are really opaque, there is a lot of room for imagination in the misappropriation, operation, and investment of funds behind similar lending CeFi. Nexo has no institutional customers this time, but that doesn’t mean it won’t happen next time. There may have been thunderstorms among institutional customers, but Nexo ensured that the assets and liabilities were matched by misappropriating assets from the books. Coupled with the extreme volatility of cryptocurrencies, if the next wave of cryptocurrency devaluation occurs and the platform faces massive runs, the evidence Nexo currently provides is not concrete enough to prove its true ability to withstand extreme risks. This situation is similar to that of banks holding real estate in 2008. If there were no massive runs and real estate prices fell, banks would not suffer a short-term liquidity crisis, thus triggering systemic risks. If the previous Luna, Celsius, FTX, etc. were not short-sold or squeezed in the short term, it is very likely that they would not have a short-term liquidity crisis and collapse.
Currently, users do not know exactly what Nexo has done to ensure the asset value in the audit report. Is the collapse of Celsius and BlockFi due to corporate ethics, or is the risk control of crypto lending itself difficult to control?
Before Celsius collapsed, it was involved in the "Ponzi" model, using high interest rates to attract new users, and using the new users' savings to return interest to old users. After the aftermath of FTX, Nexo still frequently launches new high-interest and convenient new products, including the new Mastercard launched a day ago, which has no minimum monthly repayment, provides an APR of up to 13.9%, and allows the use of Bitcoin and NEXO Rewards, currently only available to EU citizens. When the company is healthy, launching financial products that are convenient for retail investors can improve capital utilization and financial inclusion and increase user experience. However, when the company is unhealthy, it may be Ponzi.
Coincidentally, when Celsius went bankrupt and liquidated due to the collapse of Sanjian, Nexo immediately came out and said that it had no assets on Celsius and had nothing to do with Sanjian. On June 15, Nexo tweeted that it had not agreed to provide unsecured loans to 3AC in the past two years. Prior to this, Nexo and Sanjian signed a cooperation contract in December 2021 to jointly develop an NFT fund. But Sanjian collapsed too quickly. Nexo said that the project had not had time to develop, so when Sanjian closed down in June, Nexo had no connection with Sanjian.
The current expansion of Nexo may be because it has the confidence to expand and fill the CeFi vacancy with a lot of money, but it may also be a bluff to cover up internal problems that have arisen.
Zhu Su, the former head of Sanjian who did not receive a loan, retweeted a tweet posted by Zyplag questioning Nexo’s risks a few days ago, seemingly hinting at something.
In addition, Nexo has made a U-turn in its strategy in the United States, and scandals and actions have frequently broken out recently, including the recent transfer of 5,000 WBTC from MakerDAO to Wintermute, and the transfer of 15,498 ETH, of which 9,413 went to Binance. On November 22, investors Sued for allegedly freezing investor funds...
Although Nexo has its own explanation for the above news, its various actions are really confusing.
Since cryptocurrencies are not regulated, users have no choice but to admit their losses and have no way to appeal. If Nexo crashes, during the validity period, users in the United States can go to the bankruptcy court to defend their rights. Currently, the bankruptcy court has become one of the few ways for users to defend their rights in the event of a crypto thunderstorm, and is a channel for crypto appeals. Users in other regions are safe. Although borrowing can improve the utilization rate of funds, users should also pay attention to it. That is only when your collateral is guaranteed.
Reference
https://nexo.io/licenses-and-registrations
https://static1.squarespace.com/static/629566eddf761c0fd6ff930b/t/6385b5628671157ecf115ab8/1669707108984/2022-11-29-6385b209b781a94a1b238e8f.pdf
https://www.theblockbeats.info/news/31508?search=1
https://support.nexo.io/s/article/earn-daily-interest-up-to-12-apy-on-your-nexo-tokens
https://www.armaninollp.com/press-releases/armanino-elects-record-24-new-partners-in-2022/
https://real-time-attest.trustexplorer.io/nexo
https://www.theblockbeats.info/news/31162?search=1
https://blockworks.co/news/what-are-proof-of-reserves-and-can-they-build-back-trust
https://nexo.io/media-center/nexo-upscales-its-eu-wide-licensing-with-new-registration-in-italy?utm_source=twitter&utm_medium=post&utm_campaign=twitter_post_italian_license_3011_q422
https://www.armaninollp.com/articles/armanino-blockchain-adds-four-more-stablecoins/
https://twitter.com/Nexo/status/1597268261716250624
https://finance.yahoo.com/news/nexo-crypto-lender-prowl-ailing-142301996.html
