What is happening at Nexo? Crypto lender’s offices raided

What is happening Nexo? Crypto lender raided

Crypto lender Nexo had its offices raided in Bulgaria Thursday, in what is cryptocurrency’s latest tussle with the law.

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Nexo’s offices were raided by over 300 police officers and prosecutors, as part of a large-scale investigation into organised crime, money laundering, banking without a license and computer fraud, according to a spokesperson for the chief prosecutor.

Additionally, reports emerged linking Nexo with terrorist financing and the circumventing of sanctions against Russia.

The news has triggered the usual euphoria on both sides. On one hand, there are those decrying that Nexo is on its last legs, the latest crypto lender to fall victim to the relentless crypto bear market.

On the other hand, Nexo has fought back hard, tweeting that it had done nothing wrong and in fact “took one of the most aggressive approaches” regarding sanctions around the Russian war.

So, which is it?

Nexo had previously pulled out of US market

This is not a good situation. It also follows Nexo pulling out of the US market in early December. Several US states had issued “cease and desist” orders against Nexo for offering unregistered securities. The New York attorney-general’s office also sued Nexo for “falsely representing that it complies with applicable regulations and licensing requirements”.

Nexo had placed the blame squarely at the feet of regulators in a parting shot on Twitter.

Our decision comes after more than 18 months of good-faith dialogue with US state and federal regulators which has come to a dead end

I wrote a deep dive on the business model and the overall health of Nexo following that incident. You can read that analysis for the full picture but in brief, I questioned how the company was paying out near double-digit yields when yields in the DeFi space had fallen to 1%.

Additionally, I criticised its refusal to present a proper assets and liabilities and its claimed “report” which attested to its assets, which was just a line on a webpage that said its total assets “exceed” 100% of liabilities. There was – and still isn’t – any word on whether that is 100.01% or 10000%, nor anything about liabilities or how its own token is or isn’t used as collateral or in any lending products.

With such little information provided, in order to make a reasonable financial assessment of Nexo, the only thing that can be done is to blindly speculate. With the industry decimated – lending products at Celsius, Voyager Digital, BlockFi, Gemini and countless others have collapsed – it is easy to see why investors (and regulators) are concerned.

This sums up Nexo’s problem

This latest incident is just a continuation of what is Nexo’s, and all these crypto lending companies, biggest problem – a lack of transparency and the reality that they offer within a grey area of the law, for better of worse.

It’s real time “attestation” page says that it has $2.42 billion of customer liabilities. This was $3.3 billion before the collapse of FTX, highlighting how many customers have realised that this is no longer a risk-reward bet worth taking.

Aside from Nexo’s refusal to provide more information about their balance sheet, there is also the fact that US Treasury yields have risen from 0% to 4.25%. This has lowered the incentive for customers to chase yield in Nexo, as a reasonable yield is available elsewhere, and that yield is guaranteed by the US government – a far cry from what happens in the crypto lending business.

With only a few hundred basis points of extra yield on offer, but risk that is quite literally unquantifiable given how opaque the financials are, this is not a risk-reward ratio that seems attractive.

The several open investigations and lawsuits in multiple countries simply present yet another layer of risk for Nexo. Coming at a time when regulators are coming down harder on both the crypto lending space, and crypto industry in general following the FTX debacle, it is concerning for Nexo.

That is without even reading anything into the concerning accusations around Russian sanction avoidance and terrorist financing that have appeared in the last couple days, but if these accusations bear weight then that is obviously yet another problem.

The lender’s statements don’t exactly provide confidence either; they have been extremely disputatious. Yesterday’s statement was similarly aggressive as the one issued when it pulled out of the US market in December.

Unfortunately, with the recent regulatory crackdown on crypto, some regulators have recently adopted the kick first, ask questions later approach. In corrupt countries, it is bordering with racketeering, but that too shall pass

Nexo in a statement yesterday

What next?

Like I concluded in my deep dive in December, it really is impossible to make any sort of financial assessment of Nexo, because the law is too hazy in this area and the company itself refuses to provide anything close to the information that would be required. With multiple lawsuits and an evidently bad relationship with numerous regulating bodies, it paints an even more uncertain future.

It follows from the lack of transparency that customers investing in the company are forced to  gamble that everything is above board. And that may be fine – everything could indeed be above board, there is no evidence to suggest to otherwise. But it is just that – a gamble and blind faith in the executives’ word.

But the reality is that 300 lawmakers stormed Nexo’s offices yesterday on what are some very concerning accusations. And with a dire macro climate and nothing but questions around Nexo’s business model and transparency, and yields now competitive elsewhere, it is hard to come up with a motive to invest one’s cash here while following any sort of prudent risk management.