Financial Fraud Lawyers investigates
(i) What is NEXO?
Active since 2018, Nexo is a company that facilitates the exchange of digital dematerialized currencies, cryptocurrencies. It defines itself as a credit institution in the digital financial sector and is attached to Credissimo – a well-known instant lending and fintech company. The company has expanded throughout Europe as well as the United States and has raised about $52,500,000.00 in cryptocurrencies.
The Nexo platform works like an exchange, similar to the process of Binance or FTX, by offering to buy and trade several kinds of cryptocurrencies. It also works as, and might be mainly, a crypto-currency bank with loans and a bank card, available physically or virtually. Nexo offers its users to earn money by participating in loans as a creditor.
Nexo was founded by Kosta Kantchev, Antoni Trenchev, and Georgi Shulev with the purpose of creating an alternative to banking products. The platform also has its own cryptocurrency, the NEXO token, and thrives on users’ investment in it. To summarize, in addition to being a Crytpo exchange, Nexo offers “crypto” loans, which translates to pledging one’s crypto-currencies and crypto-assets for the purpose of obtaining a cash or fiat currency loan.
(ii) Loan system and NEXO token value
The principle is relatively simple: you have cash (fiat currencies, cash) and dematerialized cryptocurrencies. You can buy one with the other. You invest in these different cryptocurrencies (i.e., you buy Bitcoin, Ethereum or NEXO token), whose value can fluctuate rapidly, and choose to build a portfolio on the Nexo platform. For your information, the value of one NEXO token is currently $0.66, which is a drop from last week’s value of $0.69.
Nexo allows you to borrow cash by pawning your cryptocurrencies. To enable this (instant) transfer between virtual and physical wallets, Nexo proceeds in two steps:
First, the platform sets a value rate (Loan To Value / LTV), which represents the difference in amount between the physical currency and the chosen cryptocurrency. If Nexo sets the value rate of Bitcoin at 50% compared to the value of the Euro, pledging 100E of Bitcoin will allow you to withdraw 50E of cash. The value rate can reach 90% depending on the cryptocurrency.
Then, the platform sets a borrowing rate, which will constitute its gain on the “crypto->euro” transaction. This loan rate is set according to two elements: (a) the amount of the initial value rate (LTV) between the chosen crypto and the chosen currency and (b) the loyalty status of the Nexo customer.
This loyalty status is calculated based on a user’s propensity to invest in Nexo’s cryptocurrency, the NEXO token. The more you invest in the NEXO token, the more opportunity you will have to move up the hierarchy of the consumer-borrower of the Nexo platform. Simply put, if the number of NEXO token present in your digital wallet reaches a certain percentage compared to your other cryptocurrencies, you will be rewarded.
Finally, one may wonder what value the NEXO token really has. The way the platform works is by creating user demand for the NEXO token. The higher the demand for it, the more its value has the potential to increase. We would therefore be witnessing an artificial development of the NEXO token activity within the Crypto market.
(iii) Nexo and the Crypto market
The NEXO token does not represent anything tangible, its price can change according to the investments made on the platform. Could this resemble a “penny stock” model? When a company proposes the sale of shares whose value does not exceed $1, it generally capitalizes on a high percentage variation rate. This means that, following this principle, Nexo’s strategy would be based on increasing the price of its token by investing in it without considering the risks associated with such a financial product: any variation in the price of the share (or the token) leads to an increase in its purchase price.
Here, Nexo relies on a customer base investing in crypto. That is, the platform could not function smoothly if (a) its customers sought to borrow more cash than buy NEXO token and (b) the value of the NEXO token fell enough to make the desire to borrow from Nexo as well as use the platform obsolete.
This is not to draw tangible parallels, but to ask whether the very principle of Nexo’s operation might not be partly based on this penny stock scheme. In any case, the platform has recently been the subject of negative reactions in the United States: eight American states have filed individual complaints against the company because of the staggering interest rate offered on yield products.
Further research reveals a possible lack of transparency from Nexo. Its communication strategy is based on the affiliation between a registered and a licensed company: Nexo’s subsidiaries are all registered in their country of operation, but none of them are operating under a regulatory framework. An inexperienced user will easily confuse the information given on the Nexo website with its legal meaning. Concretely, Nexo exists under several identities in several geographical regions:
∆ NEXO FINANCIAL LLC / n˚6926549
251 Little Falls Drive, 19808 Wilmington, New Castle County, DE, United States
∆ NEXO FINANCIAL SERVICES LTD / n˚12628866
1 Canada Square Floor 39, Canary Wharf, E14 5AB, London, United Kingdom
∆ NEXO FINANCE LIMITED / TC007556
2308, Dominion Centre, 43-59 Queen’s Road East, Wanchai, Hong Kong
∆ NEXO SERVICES S.R.L. / PSV78
Via del Lauro 9, 20121 Milan, Italy
∆ NEXO SERVICES UAB / n˚305743053
Gedimino pr. 44A-201, 01400, Vilnius, Lithuania
∆ NEXO AG (NEXO LTD) / n˚1346324
Grafenaustrasse 15, 6300 Zug, Switzerland
Nexo is not regulated by CySEC or the AMF. European individuals wishing to invest in the NEXO token or take advantage of the profitable loan conditions are therefore taking a risk. The information available on the Nexo website, both in substance and form, may appear misleading depending on the audience it reaches. There is no particular mention of the lack of regulations in the European crypto market, and it is stated that the Euro is a preferred currency of the platform: this may misleadingly encourage European residents to invest on the platform without security guarantees.
Indeed, the platform boasts of being licensed and regulated, which seems strange to us insofar as there is no regulatory framework around the exchange of cryptocurrencies to date. On the one hand, this means that Nexo technically has no need to justify its regulations. On the other hand, it seems to be a deceptive practice from a legal point of view: is there any purpose to it other than to make the platform look more stable and secure than it is?
Another confusing element is that the Nexo bank card is currently only available in the European Economic Area, although the company has more than 40 branches in the U.S., which seems to make the country its preferred market.
Nexo will continue to have an advantageous position in the market as long as the number of individuals investing in its token and platform remains higher than the number of individuals wishing to withdraw liquidity. This makes sense as the cash that can be withdrawn will come from new investments and investors. The reviews that can be found on TrustPilot are mixed: complimentary or alarming, there are no half measures in the Nexo experience by its users.
But what will happen when individuals realize that all the NEXO tokens they have invested in are worthless? Will we see a “crypto-run”, similar to what happened when FTX users wanted to withdraw their cash simultaneously in anticipation of certain bankruptcy?
In light of the fallout from the FTX affair, we are entitled to question whether Nexo is a reliable platform. Public confidence in Crypto has been undermined, so we urge you to be vigilant when investing your funds in virtual platforms. Our European network of law firms will be able to represent and defend you if you have been a victim of bad practices by a Crypto broker. If you have any doubts, do not hesitate to contact us.
The Financial Fraud Lawyers network aims to inform private investors (traders) of potential malpractices by Forex and CFD brokers. Our mission is to assist and protect traders when they encounter brokerage practices that go against their interests.
Our articles are intended to warn, share and inform the public about the legal risks of Forex and its players. Trading financial products and CFDs as well as investing on online platforms carry legal risks.
The article was written in good faith, based on public information and client testimonials valid at the time of publication. Our articles concern the protection of the interests of individuals on online investment platforms and are published in accordance with our right to inform the public about our activity. This article is not to be considered legal advice.