Crypto lender Nexo had its offices raided in Bulgaria on Thursday, in what is the latest cryptocurrency fight with the law.
Nexo’s offices were raided by more than 300 police and prosecutors as part of a large-scale investigation into organized crime, money laundering, unlicensed banking and computer fraud, according to a spokesman for the attorney general.
In addition, reports emerged linking Nexo to terrorist financing and the circumvention of sanctions against Russia.
The news has triggered the usual euphoria on both sides. On the one hand, there are those who denounce that Nexo is on its last legs, the latest cryptocurrency lender to fall victim to the relentless cryptocurrency bear market.
On the other hand, Nexo has strongly defended itself, tweeting that it had done nothing wrong and that, in fact, it “took one of the most aggressive approaches” to sanctions around the Russian war.
So which is it?
Nexo had previously withdrawn from the U.S. market
This is not a good situation. It also follows Nexo as it pulled out of the U.S. market in early December. Several U.S. 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 stating that it complies with applicable standards and licensing requirements.”
Nexo had laid the blame squarely at the feet of regulators in a farewell shot on Twitter (NYSE:TWTR).
I wrote a deep dive into Nexo’s business model and overall health after that incident. You can read that analysis to see the full picture, but in short, I questioned how the company was paying for near-double-digit returns when returns in the DeFi space had fallen to 1%.
In addition, I criticized their refusal to submit adequate assets and liabilities and their supposed “report” certifying their assets, which was just a line on a web page saying that their total assets “exceed” 100% of liabilities. There was, and still isn’t, any word about whether that’s 100.01% or 10000%, nor anything about liabilities or how your own token is used or not as collateral or in any loan product.
With so little information provided, to make a reasonable financial assessment of Nexo, the only thing that can be done is to speculate blindly. With the industry decimated (lending products at Celsius, Voyager Digital, BlockFi, Gemini and many others have collapsed), it’s easy to see why investors (and regulators) are worried.
This sums up the Nexo problem
This latest incident is just a continuation of what is the biggest problem of Nexo and all these cryptocurrency lending companies: the lack of transparency and the reality they offer within a gray area of the law, for better or worse.
Its real-time “certification” page says it has $2.42 billion dollars in customer liabilities. This was $3.3 billion before the FTX crash, highlighting how many customers have realized that it’s no longer a risk-reward bet worth taking.
Aside from Nexo’s refusal to provide more information on its balance sheet, there is also the fact that US Treasury yields have risen from 0% to 4.25%. This has reduced the incentive for customers to pursue performance on Nexo, as there is a reasonable return available elsewhere, and that performance 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 additional return on offer, but the risk is literally unquantifiable given the opacity of finances, this is not a risk-reward ratio that seems attractive.
The various investigations and lawsuits opened in various countries simply present another layer of risk for Nexo. Coming at a time when regulators are being tougher in both the crypto lending space and the crypto industry at large following the FTX debacle, it’s concerning for Nexo.
That’s without even reading anything about the troubling allegations about Russian sanctions evasion and terrorist financing that have surfaced in recent days, but if these allegations carry weight, then it’s obviously another problem.
The lender’s statements do not exactly give confidence either; They have been extremely controversial. Yesterday’s statement was just as aggressive as the one issued when it withdrew from the U.S. market in December.
As I concluded in my deep dive in December, it’s really impossible to do any kind of financial assessment of Nexo, because the law is too confusing in this area and the company itself refuses to provide anything resembling the information that would be required. With multiple lawsuits and an obvious bad relationship with numerous regulatory bodies, it paints an even more uncertain future.
From the lack of transparency it follows that customers who invest in the company are forced to bet that everything is in order. And that may be fine: in fact, everything could be in order, there is no evidence to suggest otherwise. But it is just that, a bet and a blind faith in the word of the executives.
But the reality is that 300 legislators broke into the offices of Nexo yesterday for what are some very worrying accusations. And with a dire macro climate and nothing more than questions about Nexo’s business model and transparency, and now competitive returns elsewhere, it’s hard to find a reason to invest the cash here while pursuing any kind of prudent risk management.
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