The second of the three major CeFi platforms has gone bankrupt and liquidated, leaving only Nexo, which holds $2 billion in assets. After the thunderstorm of FTX, the dark cloud extended to many platforms, and Genesis, BlockFi, etc. were in a hurry; Celsius, one of the three major CeFis, had gone bankrupt and liquidated during the last round of Luna thunderstorm. Since 2022, 80% of the market value of Nexo's token NEXO has evaporated.
Gradually, people began to question the liquidity of Nexo on Twitter. Looking at Nexo’s Twitter before the end of November, most of the comments below are the voices of Twitter users’ doubts or the customer service needs of Nexo platform users, reflecting some technical loopholes. Nexo tokens continued to fall in the 7 days before December 1, and increased significantly after December 01, with the latest increase of 9, 16%. In recent days, there is no Nexo available for short selling on Binance.
In order to combat short-selling, Nexo tweeted a long list of profit models and multiple tweets on November 29 explaining its operating model and various financial terms, reiterating that it has no exposure to BlockFi and Genesis, and does not provide unsecured loans , there is no asset-liability mismatch (asset-liability mismatch) questioned by users in the other two major CeFi, and it is emphasized that the reserve certificate will be launched. Its auditor, Armanino, an American company, also issued an audit report. After investigating Nexo's wallet address, finding out the platform's assets, and understanding the platform's liabilities through the API, it issued an audit opinion indicating that the value of Nexo's US dollar assets is greater than its liabilities. Then, on November 30, Nexo announced that it had obtained the relevant license in Italy, allowing it to provide financial services in Italy and promoting its entry into the first-tier market. A day later, Nexo released another message to support Pancake.
In the case of the overall market downturn, Nexo is still aggressively expanding. Previously, it submitted a letter of intent to the state of Zug in May to purchase the assets of Celsius, and in June it purchased Vauld, a lending platform established by Peter Thiel and Coinbase Venture that was on the verge of liquidation. At present, Nexo is still expanding its products and recruiting people when the two major CeFis are closed.
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Walking into Nexo——Is it reliable to buy a banking license? legal is not necessarily useful
Nexo’s official website states that it is a digital asset platform, and its parent company’s network information indicates that it is registered in Zug Grafenaustrasse 15, Switzerland. This state has gathered a large number of cryptocurrency companies due to its loose tax policies and encryption regulations, so it does not Not surprisingly. But Nexo does not have a Swiss banking license. According to information from nexo.how, a website that is not directly tied to Nexo, Nexo was promoted ("powered by") by Credissimo, a FinTech company founded in Bulgaria in 2007 that focuses on providing financial lending services. 4 trillion cryptocurrency lending market. Nexo was founded in Bulgaria in 2018 but has since moved to Zug. Nexo’s founders Antoni Trenchev, Kosta Kantchev and Kalin Metodiev have unknown nationalities, but based on the history of LinkedIn, all three have grown up and worked in Bulgaria or companies related to Bulgaria. 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. Through a series of acquisitions of banks in the United States, there is no shortage of users in the United States. At present, Nexo has money transfer licenses in Arizona, Alabama, and Kansas in many states in the United States, and can legally operate financial services. Among them, it has lender licenses in Oklahoma, New Hampshire, and Wyoming, and can borrow money business. Having the right to operate a financial service does not mean that the funds are insured by the government. In September 2022, Nexo took a stake in Hulett Bancorp in 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 U.S. government’s deposit guarantee. There are 4 outlets in Idaho and Montana. Nexo said the investment could expand its undisclosed business in the United States. Nevertheless, a few months later, Nexo said on December 6 that it would gradually stop its products and services in the United States in the next few months. Earlier in September, 8 states in the United States sued Nexo (inheritance management lawsuit), saying that its products that can collect interest rates should be registered as securities (security). Nexo blamed these regulators for the big strategic turnaround in the United States, saying that the regulatory conditions in the United States are still very immature and clear, even though the encryption regulation in the United States is no longer gray soil in a black area in many major countries and regions.
If most of the various licenses on Nexo’s official website are from the United States after the United States leaves in a few months, then what identity will Nexo use to provide financial services in the future?
Nexo's license in Switzerland is the "SO-FIT" of the Canton of Geneva, a non-profit organization regulated by the Swiss Financial Services Authority for self-regulation (autogulation). Members participating in SO-FIT need to consciously maintain industry standards and use qualified auditors , combating money laundering and financial crimes, etc. At present, you can see a series of industry standards called for, but if it is illegal, what consequences will be unknown.
Under the circumstance that the overall compliance of the encryption industry is not strong, Nexo has always been proud of compliance in its external publicity. The various financial-related operating licenses collected by Nexo in the United States can also prove its strategy and strategy of developing financial services as legally as possible. Implementation modalities. It’s just that this compliance only means operational compliance, and does not mean that assets are guaranteed. BlockFi, which went bankrupt before, also pointed out in the exemption clause that BIA is not a bank and will not be protected by supervision. It also said that BlockFi is very "compliant" in many ways, and in the end it still cannot escape the bankruptcy.
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Partial screenshot of supported currencies on Nexo official website, note that NEXO is on the right
According to Nexo's official website, users who hold NEXO and participate in the Nexo Earn Product project can get at least 1 NEXO per day, and can get up to 12% APY, with daily compound interest. This product is not open to users in Bulgaria, Estonia, and the United States (also interesting here). Previously, in order to ensure such a high APR, Celsius took many risks to participate in high-risk projects, resulting in heavy losses. BlockFi even embezzled users' funds for its own mining services. In the end, due to the decline in asset value, there was a mismatch between asset value and liabilities.
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Insurance and Platforms - Is Real-Time Auditing Reliable?
Since Nexo itself does not have a banking license, it is not a custodian bank (custodians), and assets stored in Nexo are hosted by a third-party custodian platform. Nexo has $775 million in insurance on crypto service providers BitGo, Ledger, bakkt, Fireblocks, and others, which are underwritten by London-based Lloyds Bank and Marsh & Arch. Previously, Ledger was caught in a hacking scandal in 2020 and user data was leaked. Ledger stated that it would not pay compensation for this but was working hard to strengthen financial security. In the traditional mutual fund industry, if the mutual fund company goes bankrupt, the custodian bank returns the assets in custody to shareholders. In the encryption industry, whether the risk is "micro-prudential" (micro-pru) or "macro-prudential" (macro-pru), it is still hard to say. And it is not disclosed whether the custody funds are in the form of volatile cryptocurrencies or converted fiat currencies.
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Screenshot of Armanino's live audit
Real-time PoR cannot prove the liquidity of a company's assets, or even whether the company has so many assets. The existence of PoR seems to give users a reassurance, but the effect of this reassurance is not necessarily scientific and reasonable. The author has previously written an article on the analysis of stablecoin auditing "What can we observe from the USDT five-year audit report?"In addition to algorithmic stablecoins, most of the top stablecoins will release PoR audit reports monthly or in real time to prove their book asset value. However, apart from Tether, other fiat currency stablecoin companies have not released details of US dollar assets. Tether’s books show that most of its assets are extremely liquid U.S. bonds, cash, etc., and investment corporate bonds and other metal and electronic asset investments only account for a small part. This ensures that when Tether suffers from a run, it can mobilize liquidity for a short time and confirm that its funds are unblocked. The dollar value that other companies don't disclose in detail can even be real estate. Although the value of the U.S. dollar is still very large, it is still insolvent on the books, but real estate is extremely illiquid compared to U.S. debt and cash. Once a run occurs, the company will face liquidity crunch and can only borrow money or declare bankruptcy. During the financial crisis in 2008, it was not that the banks did not have enough assets. It was just that when the subprime mortgage collapsed, the assets in the hands of the banks were mortgaged real estate rather than highly liquid assets. The same can be said for cryptocurrencies, where the asset value does not justify the liquidity of the asset class. This is evident in the bankruptcy case of FTX. Many of FTX's assets are FTTs with poor liquidity, which finally led to the sale of FTTs during the run, and then a vicious circle of liquidity crunch.
At present, according to the loan-to-value ratios (value ratios of loans and collaterals) of various currencies published on the Nexo website, it is more likely that the company's books are cryptocurrencies with relatively high liquidity.
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Summary: Don't be afraid of not having an asset, but be afraid that the asset class will not flow
Nexo’s executives have decades of hard finance and fintech backgrounds and licensed operations, so they should be more experienced in how to avoid liquidity risks that are common in financial history. Nexo's series of licenses and Twitter's occasional tweets clarifying risks and exposures also show Nexo's external risk control caliber.
According to the information released by Nexo on Twitter, the company is undoubtedly "lucky". It has avoided the company that was hit by thunderstorms many times. The market does not allow loans, and does not provide unsecured loans to encrypted asset managers. After the 2008 financial crisis, traditional banks must conduct sensitivity tests (sensitivity tests), that is, to test the bank's ability to withstand pressure in extreme cases of bank runs. According to Nexo, there is also an internal system to test the short-term liquidation of collateral in extreme situations, and no one dollar has been lost so far.
Maybe what Nexo said is right, but in view of the fact 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 loans to CeFi. Nexo did not have any institutional clients this time, but that doesn't mean it won't happen next time. There may have been thunderstorms from institutional customers, but Nexo has guaranteed the matching of assets and liabilities through book misappropriation of assets. Coupled with the extreme volatility of cryptocurrencies, if the next wave of cryptocurrencies depreciates and the platform faces a large number of runs, the evidence currently provided by Nexo is not specific enough to prove that it truly has the ability to resist extreme risks. This situation is similar to the banks holding real estate in 2008. If there is no massive run and real estate prices fall, banks will not suffer a liquidity crisis in a short period of time, which will cause systemic risks. If the previous Luna, Celsius, FTX, etc. were not short-sold or run on in the short term, it is very likely that there will not be a short-term liquidity crisis and thus go bankrupt.
At present, what Nexo has done to ensure the asset value on the audit report is unknown to users. Is the collapse of Celsius and BlockFi due to corporate ethics, or is the risk control of encrypted lending itself difficult to control?
Before Celsius’s collapse, it was involved in the “Ponzi” model, attracting new users with high interest rates, and using the savings of new users to repay the interest of old users. After the aftermath of FTX, Nexo still frequently launched new high-profit and convenient new products, including the new MasterCard launched a day ago. This card has no monthly minimum repayment amount, provides the highest APR of 13.9%, and allows the use of Bitcoin and NEXO Rewards is currently only open to EU citizens. When the enterprise is healthy, the launch of financial products that facilitate retail investors can improve the utilization rate of funds and financial inclusion and increase user experience, but when the enterprise is unhealthy, it may be Ponzi.
Coincidentally, when Celsius went bankrupt and liquidated due to the collapse of Sanjian, Nexo immediately said that it had no assets on Celsius and that it had nothing to do with Sanjian. On June 15th, Nexo tweeted that it had not agreed to lend 3 AC unsecured loans in the past two years. Prior to this, Nexo and Sanjian signed a cooperation contract in December 2021 to jointly develop an NFT fund. However, Sanjian closed down 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 to fill the vacancy of CeFi with a lot of money in its hands, but it may also be a bluff to cover up the internal problems.
Zhu Su, the former head of Three Arrows who did not get a loan, retweeted a tweet from Zyplag, which questioned the risks of Nexo, a few days ago, which seemed to imply something.
Coupled with Nexo’s U.S. strategic turnaround, scandals and actions have emerged frequently 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. 11 On March 22, the investor sued for allegedly freezing investor funds...
Although Nexo has its own interpretation of the above news, its various actions are really confusing.
Since cryptocurrencies are not regulated, if users have lost funds, they can only admit that they have no way to complain. If Nexo is thundered, within the validity period, users in the United States can go to the bankruptcy court (bankruptcy court) to defend their rights. At present, the bankruptcy court has become one of the few means for users to protect their rights in the encrypted thunderstorm incident, and it is a channel for encrypted complaints. Users in other regions stay safe. Although borrowing can increase the utilization rate of funds, users should also pay attention, that is when your collateral is guaranteed.
Reference
https://nexo.io/licenses-and-registrations
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://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
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