Inside Nexo: one of the biggest crypto-banks in the world

Inside Nexo: one of the biggest crypto-banks in the world

The Bulgarian company claims to run 10 billion dollars in assets. Such growth comes with challenges

Just before noon on 12 January 2023, an "international operation against a large-scale financial crime scheme" (according to the State Prosecution) hit the offices of the Sofia-based crypto bank Nexo. As we prepare a longer update for you, revisit Yoan Zapryanov's original inquiry into Nexo's business activities from last year.
Main takeaways
  • Bulgarian crypto bank Nexo is among the largest in the global industry and manages assets worth $ 10 billion
  • It operates in the unregulated world of cryptocurrencies, which currently allows banking without regulation
  • Nexo has faced difficulties associated with its own rapid growth, as well as customer claims, a lawsuit in the US, accusations of market manipulation and the unclear evolution of its business model

"If we were a bank in Bulgaria, we would be the biggest one," says Antoni Trenchev, one of the founders of the cryptocurrency company Nexo. It is Monday morning and Capital is talking to him and his partner Kosta Kanchev while the crypto market is colored red. The charts on the screens show declines of about 10%, which, if it was happening in a classic financial company, would cause panic on the floor. But here everything is in order, because it's part of the daily routine.

They say that the company currently manages $ 10 billion in assets. In the volatile world of cryptocurrencies, this is nothing more than a snapshot, which can be transformed in a day or even an hour. Even with this convention, Nexo claims to be among the largest in the global world of crypto assets.

By most criteria, the company, founded in 2017, looks more than successful: according to Trenchev (who was then 29 years old and was already an MP from the Reformist Bloc) and Kanchev (31, and co-founder of the loan company Credissimo) it is a leader in its niche and develops its own product. Almost all employees are in the Sofia office - about 300 people, and 20 new staff join every passing month. There are 2.5 million registered users in the platform, although fewer than half are monthly active.

So far, the company has not published reports and has not raised external funding to give it a market valuation. But it has distributed dividends to people who own its NEXO tokens, which suggest a profit of about $100 million over three years. And the tokens themselves are currently trading at levels around 1.4-1.8 dollars, which gives them a market capitalization of 0.8-1 billion dollars. At the beginning of the year they are twice as expensive.

At the same time, despite the impressive numbers, Nexo is suffering from something of an identity crisis. Even at this scale and scope, it is almost completely unknown in Bulgaria. Although its slightly enigmatic advertisements adorn billboards in the center of Sofia, they seem to aim at creating a name for easier recruitment.

This can be explained in part by the fact that Nexo's services are not available in the local market and cryptocurrencies are an incomprehensible topic for most people here anyway. It could also be because in recent years, if you have a growing and profitable business in Bulgaria, it's a good idea not to stand out. However, even for specialized professionals with interests in finance and cryptocurrencies, the Nexo model is not entirely clear - many don't understand how it works and how to benefit from it.

In short, Nexo is something like a bank - it gives loans against collateral in cryptocurrency, and it has deposits, which pay interest. This happens in the unregulated Wild West of the crypto market, where each player looks to take positions quickly without saying much about how he does it, so as not to reveal his know-how to competitors.

Despite the massive advertising campaign over the past year, which included publications in all economic publications in the country (including more than 20 advertising materials in Capital itself, marked as advertisement), it is difficult to get a consistent account of the company's business model. On one hand, this is because of uncertainty how regulators will shape the future of cryptocurrencies as an industry. On the other hand, because of the tension of the fundamental question: how long can a financial business generate abnormal returns?

Whether for these or other reasons the founders of Nexo prefer to avoid publicity, employees are forbidden to speak, the office is full of cameras. All this leaves an information vacuum, which is logically filled with doubts, suspicions and speculation in forums and social media. Nexo faces difficulties linked to its own rapid growth, as well as customer claims, a lawsuit in the United States, allegations of market manipulation and complex regulatory procedures.

The first years

Nexo began operations in 2018, initially under the name NexoBank, which was a slightly risky move, given that in many places the law prohibits financial companies from calling themselves a bank without a license. In Bulgaria, the Law on Credit Institutions also explicitly contains such text. Thus, the second part of the name quickly disappeared, and according to Kanchev, this was due to naivety and an attempt to secure a better internet domain.

Apart from Kosta Kanchev and Antoni Trenchev, Georgi Shulev was among the founders from the outset, but he left in 2019 after a misunderstanding with the others. Shulev refused an interview with Capital. Trenchev and Kanchev also declined to comment on the case.

Nexo rapidly raised $52.5 million. Initially, the company announced that it would offer a security token, i.e. officially registered security. In his conversation with Capital, however, Trenchev explained there was no public offering of the token after all, because all the money was raised during private rounds.

Subsequently, the token appeared on cryptocurrency exchanges, where it can be purchased freely. The promise to those who invest in the token is that 30% of the profits will be returned as dividends to its owners. Nexo claims to have paid more than $30 million in dividends in the past three years. From 2021, the payment of dividends has been suspended after a vote among holders of the token.

Until recently, it was thought that Nexo was in a consortium with the fast loan company Credissimo, which Kanchev co-owned, together with Sokol Yankov (according to the Commercial Register, Kanchev was on the board of directors of the Bulgarian company Credissimo from 2011 until the beginning of 2021). In the first years of Nexo's existence, the company actually introduced itself with the addition of "Powered by Credissimo". The idea, according to Kanchev, was to transfer the good reputation of his previous endeavor, but legally and organizationally the two companies have nothing in common.

Antoni Trenchev
Source: Nexo

The same is said by Credissimo in response to questions from Capital: "Currently, as at the beginning of the creation of Nexo, there is no legal or any other relationship between Credissimo and Nexo as companies and no liability arising from this. The management of the Credissimo group does not participate in any form, has no ownership of, and no relation to the decision-making for the management of the company Nexo, and vice versa. Kosta Kanchev, even during his time as a shareholder in Credissimo, did not serve any operational functions in the management of the company. His decision to leave Credissimo as a shareholder was dictated solely by his desire to focus on the development of his company, Nexo."

Nexo Inc., Nexo AG, Nexo OU, Nexo LLC ...

From a legal point of view, Nexo is not a single company. It operates through a number of entities in different jurisdictions: in the USA (Nexo Financial LLC; the entity is registered in the state of Delaware, which is an offshore zone), Great Britain (Nexo Financial Services LTD), Estonia (Nexo Services OU), Lithuania (Nexo Services UAB) , Switzerland (Nexo AG), Hong Kong (Nexo Finance Limited), the Cayman Islands (Nexo Capital Inc.) and the Marshall Islands (Nexo A.G.; identical name to the Swiss entity), as well as the Bulgarian entity NDS, which actually develops the product - in it is the whole real team behind Nexo. For 2020, NDS reports BGN 8.8 million in revenues and BGN 857 thousand in profit.

They are not organized under one hat, as some are owned by each other and others directly by Kosta Kanchev. This structure is such, Kanchev and Trenchev say, for three reasons: the regulatory framework, working with banks and rapid growth.

Existing regulations concern individual jurisdictions or individual products. Accordingly, when a multi-layered service is offered as with Nexo, one product is served by one entity, another product by another, this is standard, and in fact - the only possible practice in the entire crypto space. "So what may seem unnecessarily complicated from the outside is the mechanism that allows us to work and offer innovative solutions while waiting for regulators to create the necessary framework," explains Trenchev.

Separately, although the crypto company Nexo also serves various classic currencies, it accepts card payments, which means working with banks. And they, according to the company, are skeptical of complex holding structures. Now, however, according to the two, the time has come for the organization to fall under one holding company - Nexo Inc., an entity already established in the Cayman Islands.

This type of corporate transformation and step-by-step arrangement is not uncommon for companies that operate globally and grow rapidly. For example, Nexo's competitor Celsius also has dozens of entities. The big risk for clients is that they are not always aware of which company they have signed a contract with, which service is provided to them by which company and respectively in case of a dispute they don't know where and against whom to file claims.

For example, a check by the lending comparison site P2PEmpire shows that European customers of Nexo sign an empty contract with no entity on the other side.

In July 2021, Nexo used similar arguments in the most famous and largest lawsuit filed against the platform to date - saying that individual companies have nothing in common and are separate businesses that are not responsible for the activities of the others.

Trenchev says that this structure does not affect the consolidation of financial performance, because it is already happening anyway. "No one wants audited reports more than we do - they are the necessary step for our development. We are in a process of 'principled consolidation', i.e. all companies are currently under the holding cap, that is, even now our auditors look at the figures globally for all our companies. And the results are already there - the first real-time cash audit of its kind, which shows that Nexo's assets cover more than 100% of our liabilities. We are the only credit institution in crypto on a global level that has such an audit," says Trenchev.

So far, Nexo has not published a public report, but since the end of September, a website has indeed been operating to check the size and availability of the company's assets through the auditing company Armanino. Kanchev added that the total profit was formed in the Cayman entity Nexo Capital Inc., through which dividends were also being paid. They were stopped in mid-2021.

Crypto loans, crypto deposits

In short, Nexo's model, as well as others in the segment such as BlockFi and Celsius, is basically a copy of classic banking. It grants a credit, with the client providing their own cryptocurrencies as collateral. Typically, it can withdraw up to 50% of their value in hard currency, and the large coverage is logical given the sharp fluctuations in cryptocurrency prices. If the value of the crypto collateral falls below a certain level, the client must deposit more funds in crypto to repair the LTV (loan-to-value) balance.

With the return on these loans, the company can also afford to pay interest on cryptocurrencies, which are in fact deposits, although companies in the field avoid calling them that.

The big question in this situation is how, and how much, does Nexo earn from the interest margin after advertising interest rates on loans starting at 6.9% and those on deposits up to 12%? The explanation is that these numbers are purely for marketing, and the averages are quite different. The difference is not only positive, but also expanding (currently about 2.7%), because the company's costs fall with the rise of its reputation.

Indeed, the offered interest rates on loans reach 13.9%, depending on what part of the client's portfolio is made up of NEXO tokens. Interest rates on deposits, on the other hand, also vary: between 6% for the most popular cryptocurrencies, such as Bitcoin and Ethereum, and 10% for stablecoins, which are pegged to the traditional currencies dollar, euro and pound. If the deposit is in NEXO tokens, this adds another 2% on top. Thus, Nexo practically offers a deposit with 12% interest on hard currency. The interest rate is similar for, and for BlockFi it is 8%.

The second source of income comes from currency exchange. "For the convenience of customers, we do not charge fees and commissions for our exchange service, and our income is contained in a minimal spread between the rates at which Nexo conducts transactions and those that customers receive. Before each transaction is made, the customer sees and confirms the amount of currency he will receive. Since crypto is a dynamic industry where things that take years with traditional financial instruments happen quickly, investors scroll through their entire portfolio several times a year. Thus, in the long run, this small spread becomes a serious source of income for the company, "says Trenchev.

The third line of income is the "yield farming", in which money from deposits is given to other institutions, where there is low liquidity and, accordingly, interest rates are even higher. In this case, the company collects the difference between the interest rates. "It is structured a bit like a company within a company; we have a whole department that studies new things - smart contracts, protocol codes, economic models, liquidity monitoring, etc. We are in the initial phase, but we are doing it, because this is part of the future," says Trenchev.

On the brink of regulation

In conventional finance, what Nexo and its competitors do is called banking - it requires a license and is subject to strict capital and liquidity regulations. However, cryptocurrencies at this stage are neither money nor securities and are generally in the gray area, where various regulators are only just beginning to reach out to them. Although most companies in the industry boast licenses on their site, the founders of Nexo say they don't need them in order to continue working. They bring them out as a preventive measure against future regulation and as something that gives peace of mind to banks and their other counterparties.

The technical explanation is that all the money that goes through Nexo, on entry and exit, is converted into stablecoins. In theory, they are hard money and have a constant value equal to traditional currencies. In practice, however, governments and regulators do not recognize these cryptocurrencies as money.

"Our business is in the crypto. When the customer takes out a loan, it is in crypto. It translates bitcoin and gets digital stablecoin, which is also crypto. In most of the jurisdictions we don't need a license at all, as everything is in a crypto, which does not have the legal status of money," says Trenchev.

Until recently the company promoted deposits on hard currencies - EUR, USD and GBP

This wide-open door to unregulated banking currently goes unnoticed by most governments around the world. In the United States, for example, Nexo's deposit product is banned in New York, New Jersey, Kentucky, Arkansas, Alabama and Washington. All BlockFi operations are suspended in New Jersey, Texas and Alabama. At the end of September, the same states demanded the cessation of Celsius' activities. The companies have the same business as Nexo.

There is also interest from the highest levels of the regulatory pyramid: the US Securities and Exchange Commission (SEC). Coinbase, the cryptocurrency exchange, which has been a public company listed on the New York Stock Exchange since this spring, also had a plan to launch a product through the platform to pay interest on stablecoin investments in the same way Nexo, BlockFi and Celsius do. The SEC responded with a precautionary message to the company that it would sue it if it released the product. Coinbase eventually abandoned its plans.

Trenchev and Kanchev say they are collecting licenses so that when the regulation comes, they can continue working. According to their website, they already have credit licenses in more than ten states in the United States. This is not the case in Europe, where they do not have any - but they both claim that not all their licenses have been published. Kanchev openly defends the need for regulation, which may sound like a paradox, but in fact it makes sense, because it would close the door for new companies that have missed the period of anarchy in the industry.

At the same time, the two entrepreneurs claim, even if a very strict regulation is adopted in the United States, which would make their activity in the country impossible, it would not be a fatal blow to Nexo's business. Unlike BlockFi and Celsius, which focus almost entirely on the United States, Kanchev says Nexo's largest market is Southeast Asia, with the United States responsible for about 30 percent of the company's customers.

Regulators' increased attention to crypto lenders also has an impact on companies' marketing. For example, Nexo no longer claims on its website that it offers deposit accounts in hard currencies, but only in crypto.

But even if they are not vital to the company, licenses, in addition to reputational benefits, sometimes carry negatives. Until recently, Nexo declared licenses in only one country in Europe - Estonia. Nexo Services OU has three of them, issued in 2018 - for a virtual wallet, for exchange, as well as for operating as a financial institution. The first two were taken away in September 2020, and the third one in March 2021.

Even before that, the company faced other problems in the country. In 2019, the Estonian authorities, represented by the Estonian Financial Inspectorate (FI), came out with a position that directly groups Nexo and Credissimo. It states that "to the best of their knowledge, Nexo acts as an intermediary between Estonian consumers and the crypto loans offered by Credissimo. Note that Nexo is not authorized to act as an intermediary for consumer loans and Credissimo is not allowed to provide loans at all, so they cannot operate in Estonia. "

Trenchev gives his explanation for the case: "The regulator in Estonia, like most, has limited resources. The practice is to collect enough materials on a case, to make an inquiry to the company and only then, eventually, to take any action. In this case there was a direct unilateral action without questions, without attempting to contact us, without checking the allegations and facts. At the same time, we searched in vain for communication with the regulator. Therefore, on the advice of our local legal advisers, we had to file a lawsuit against them, which we unsurprisingly won in the first, second and third instance, and the court forced them to remove the document. But there is something else - the government in Estonia has changed and the new administration has a very negative attitude towards the crypto business, which is evident from the recent statements of their Minister of Finance, as well as the withdrawal of 3/4 of the licenses issued in the country."

However, according to the Estonian authorities, the licenses of Nexo Services OU were revoked for another reason - a change in the country's legislation, which would introduce a stricter framework for companies in the cryptocurrency sector. In one of his statements from this year, Antoni Trenchev says that Nexo is working on getting back its licenses to Estonia. The regulator claims that it requested additional information from Nexo, which was tacitly denied.

"Estonia tightened requirements for virtual currency companies in 2019, when the Estonian Parliament passed amendments to the law. As a result, in 2020, the FIU revoked virtual currency licenses for more than 1,000 companies. Nexo Services OÜ's licenses for providing virtual currency service, both wallet service and exchange service, were revoked in the autumn last year, because the company did not meet the stricter requirements of the law. In March of this year, FIU revoked the company's activity as a financial institution because the company repeatedly did not comply with the precepts of the FIU. Supervision proceedings were initiated and information was requested, but the company repeatedly failed to respond," reads the response of the Financial Inspectorate in Estonia to Capital.

Salvation comes from a neighboring country - Lithuania. As of September 2021, Nexo has published identical licenses published on its website - for registration as a virtual currency, for an exchange operator and for a digital currency portfolio operator, but this time by the Lithuanian regulator FNTT.

My crypto, your crypto

In 2020, Nexo's business was growing significantly in terms of assets and customers managed, not least due to the huge growth of the crypto market. At the same time, Nexo went through several hiccups and outright scandals. The genesis of almost everything lies in Nexo's original promise: that when customers take out a loan, they do not lose ownership of their cryptocurrencies in collateral.

According to former Nexo employees, the company's basic rules have been radically changed so that the ownership of the collateral is transferred to the company. Trenchev and Kanchev deny that there were any changes in the rules, apart from "refining the language".

These claims contrast with Nexo's whitepaper document, which dates back to before the company began operations, and has been since taken down from the company's website. According to it, the company's customers "retain 100% ownership of their digital assets."

Capital has Nexo's previous lending rules. They were downloaded from the archiving site Wayback Machine in June 2019. According to sources of the publication, they were changed around or immediately after "Black Thursday" - the collapse of the crypto market by 50% on March 12-13, when Nexo liquidated en masse loans that suddenly turned out to be bad. Capital cannot verify how long the company's original rules have been in effect because has been deleted from the online archive.

The main difference between the old and new rules is in the ownership of assets. According to Capital's legal adviser on the subject in the old version, the assets enter as a pledge, a form in which the client retains ownership, but in case of non-compliance with the terms of the obligations, the company may sell it. However, the new rules automatically transfer ownership to Nexo.

A former employee says the new rules were directly copied by a rival company in the same field, with some clarifying changes. The main goal was for the collateral money to be used for whatever purpose the company requested.

However, according to the two managers, the ownership of the collateral has always been in Nexo: "As long as there is active credit, the client agrees that Nexo becomes the beneficiary owner of the assets left by the client as collateral. This is standard practice for such transactions, so that we can sell the collateral in a 50+ percent drop in its value, which protects the people on the other side of the deal - namely those who provide the funds to finance this loan. "

Other changes to the rules include disclaimers in the event of liquidations and technical problems. Mandatory winding-up alerts are desirable because of the "volatile nature of the digital assets market". Customers also agree that they cannot participate in group lawsuits against Nexo, part of the rules that will not be followed by the California court in the largest lawsuit against Nexo to date.

The Chainlink case

In July 2020, Nexo signed an agreement to accept the cryptocurrency Chainlink as collateral on loans. A few days later, a report by Zeus Capital, an analyst company, appeared on the Internet. It claims that Chainlink is a value-added scam and that the price will fall by 99% to seven cents, at a price of $7 at the time. The opposite happened - the community around Chainlink organized itself, so on August 10 the price jumped to $18.

Zeus Capital was created just days before and the Chainlink report is the company's only product. This raised doubts in some parts of the crypto community, which began to wonder where the report came from. In the code itself on the Zeus Capital page there are links to the Nexo site. Reddit and Twitter users cite as further proof that they received the report via e-mail, which they use only for their Nexo accounts. The report also includes a name: "Simeon", which directs attention to Simeon Rusanov, director of research at Nexo.

Both then and now, Trenchev and Kanchev deny having anything to do with the report. Trenchev told Capital: "Chainlink is one of the many currencies we accept on our platform, and the addition of a new type of asset is a function of many studies of the protocol or their product, conversations between teams, their partners and the community. Accordingly, our team, as with the addition of each new asset, had gone deep into the subject. It is common practice in the crypto community for people to actively share information on the projects they are considering. Apparently one of our people talked to other people who used some of the information gathered for this famous report."

Former employees of the company say that they were aware that Nexo was behind Zeus Capital, and the official explanation inside was that the company was falsely accused and an internal inspection would be carried out.

A former employee says that the initial version of the report, authored by Simeon Rusanov, expired in internal communication months earlier. Capital has the draft that has been slightly edited, but the main content is the same and it can hardly be called a study because it accepts that Chainlink is a fraud as a starting point.

Two former employees (in separate conversations with Capital, without knowing of the existence of the other source) argue that Nexo had an open short position on the price of Chainlink (a bet that the price will go down), with the possibility to then open a long position in the opposite direction. A third former employee said he had direct contact with the short position and confirmed its existence.

According to one of Capital's sources, at certain times the company worked as a hedge fund by opening positions to the market. This is not a precedent in the world of crypto. Similar is the case with the bankrupt company Cred at the end of 2020, which provides loans against collateral in cryptocurrencies, similar to Nexo, but used its customers' money for speculation.

In a short answer to a question from Capital regarding whether the company trades short and long positions, Kosta Kanchev answered: "No."

The Chainlink case has led to a wave of Nexo employees leaving. Some of them claim that they were threatened when they left, and then subsequently. The Nexo employees' accounts in the platform, even if they were used before they were part of the company and were made with personal emails, are frozen. They also include their "bonuses" in the form of NEXO tokens, which are not a small part of the company's salaries. Salaries at Nexo are around the average for the IT sector in Bulgaria, but one of the advantages is the bonuses paid in tokens. Thus, they can get them practically only if they return to work. An employee told Capital on this occasion: "Not in this life."

The Ripple lawsuit

The other controversial episode around Nexo is from the end of 2020. On December 22, the US Securities and Exchange Commission (SEC) filed charges against Ripple Inc., the company behind the cryptocurrency XRP (often called simply Ripple), and two of its directors, Christian Larsen and Bradley Garlinghouse. They are accused of raising a total of $ 1.3 billion through cryptocurrency without registering it as a security.

The price of XRP collapsed by more than 50% in two weeks - from 58 cents per coin on December 20 to 22 cents on December 28. Nexo, which offers loans secured by XRP, responded by liquidating its customers' positions. The company's version is that these were customers who could not repay their loans or deposit additional collateral. The dissatisfied customers' version is that they never received such an opportunity.

A few days later, the executive director of Nexo Antoni Trenchev published an article, reprinted in a number of cryptocurrency editions, entitled "Why liquidations protect us all." There is another detail - Nexo claims that it should have specifically eliminated the XRP positions of its customers, because the SEC has ordered a stop to any trading in cryptocurrency.

Nexo's customers, whose assets have been liquidated, do not seem to think they have been protected. Unlike the liquidation case in March 2020, on this occasion clients with involuntarily closed positions managed to organize and file a lawsuit in California. A total of more than 100 clients have filed a claim for damages of more than $5 million.

The lawsuit alleges that, contrary to its own rules, Nexo did not give a signal to its customers or the opportunity to put in more money to repay the loan within the rules. Shortly afterwards, Nexo sold all the "confiscated" XRP coins at its disposal, with the company liquidating a total of $5 million in bets to its customers without any choice, the lawsuit said.

The case raises a number of open questions regarding the business model and structure of the company - from the entities to the ownership of collateral.

The lawsuit was filed against five of Nexo's entities (the American, British, Estonian, Swiss and Cayman ones) because it is not clear exactly which one of them carried out the liquidation. In this connection, Trenchev's quotes in Bloomberg, according to the plaintiffs, confirmed that although there were many Nexo entities, the company was one, even without a holding company to unite the individual units. Another argument in this direction is that the license for loans in California is registered under the name of Nexo Financial LLC (the American entity), but the given addresses are those of the British and Cayman entities.

In July, Trenchev asked the California court to drop the case, under the pretext that California had no jurisdiction over it. He cites the company's corporate structure, saying that the company's individual entities are also separate businesses. Three of them - Nexo Services OU (Estonia), Nexo Financial Services (UK) and Nexo AG (Switzerland) are grouped as "European Nexo entities", which are separate business entities with their own directors, "although some of them overlap" and are "subject to regulations in other jurisdictions".

In his request to close the case, Trenchev also said that the loan was given by the Cayman entity, Nexo Capital Inc., and the American Nexo Financial LLC received a loan license in California in February 2021, after the events that led to the case, which date from December 2020. Yet, in conversation with Capital, Trenchev and Kanchev say that such licenses are not needed for the company's activities. Both companies are said to be based in the UK.

The second important detail is that the plaintiffs' lawyers pay great attention to the Nexo rules themselves, which they do not think should have any real legal weight, because in short they say that the company is not responsible for anything in any situation and that customers are not entitled to be part of class action lawsuits.

The third important detail is that the plaintiffs refer to Nexo's marketing strategy and whitepaper document, which states that the company's goal is to enable crypto owners to use their assets without selling them, i.e. the cryptocurrencies themselves do not change ownership. However, following the liquidation shocks of March 2020, the current rules have been changed so that when taking out a loan, the cryptocurrencies in pledge actually change ownership and until a loan is repaid, they are not owned by the customer. The plaintiffs point out that this also raises questions regarding taxation.

"The notion that Nexo acquires "ownership" of its customers' digital assets during their use of the Nexo Crypto Credit not only is completely inconsistent with this advertising, but- as Nexo's own whitepaper indicates-would raise serious questions about the tax consequences for both Nexo and its customers if such a change in ownership were actually effected", reads the class action lawsuit.

In his conversation with Capital, Trenchev said about the lawsuit: "We never run away from responsibility. In the XRP situation, we have not done anything wrong or anything outside of our general terms and conditions governing customer relations. That's why we're going to court again - we are sure we will win. The case concerns the pause on our part of some of our services related to the exchange of the cryptocurrency XRP, because the SEC declared it a security, which means a specific regulatory regime. We cannot help but comply with this fundamental change in the status of this cryptocurrency; it is no coincidence that all serious institutions in the crypto have taken the same action. Clients, of course, continued to be able to repay their loans, withdraw their XRP assets, but there is no way in view of the case of SEC vs Ripple Inc. to continue to offer an exchange service with this currency, as the regulator simply does not allow it."

The position is almost identical to that of the company from the end of 2020 - it is based on the actions of the SEC. There is nothing in the regulator's position that directly says companies have to stop trading or acting on XRP. The plaintiffs' point of view is different.

"Seeing the price of XRP thus drop significantly, on December 23, Nexo suspended

customers' use of XRP to stake as collateral or pay down on loans, and did so without providing notice of the suspension. Nexo did so because it did not want to be left holding XRP at its substantially decreased value-not because Nexo believed that the SEC's announcement counseled against the use or sale of XRP. Indeed, within hours of this suspension, exercising a purported contractual right of "ownership" over its customers' collateral-a claimed right that is precisely the opposite of Nexo's extensive advertisement that its credit service does not involve any transfer of ownership of the customer's digital assets-Nexo proceeded to sell massive quantities of the XRP collateral. Nexo thus had no genuine concerns with transfers of XRP for value."

When asked whether liquidations without warning mean that the risk is borne only by the client, but not by the company, Trenchev replied: "Nexo is an intermediary - on one hand we have people who take loans, and, on the other, people who earn interest. If we do not liquidate borrowers' assets when prices fall, we put the other party at risk - the interest earners. It is our responsibility to keep the balance and keep the interests of both parties."

There is still no verdict on the case and there may not be for years, but it may be indicative of Nexo's business model - in California, the United States or globally. At the same time, there is another hypothesis: there might be no decision at all, if the court respects the company's desire to close the case.

The bank that wants to become a bank

Against the background of all this, Trenchev and Kanchev look and sound optimistic. During their two-hour conversation with Capital, they also talked about their plans to work as an actual bank. As early as 2019, Trenchev says that the company is in the process of acquiring a bank, and the question of whether it is possible for a crypto company to obtain a banking license is evergreen both among them and among their competition.

Source: Капитал

"We have participated in several procedures for acquiring a bank, but in both cases during the due diligence processes things came out that we did not like. That is why we started a procedure for licensing a new banking institution. We hope for a positive development by the end of the quarter. Separately, we have been in the process of acquiring a minority stake in a US bank for over a year now, which is also in the final stages," Trenchev explained.

The conversation ends with their vision of what the company, and also Bulgaria, should look like in the future. The example they give is Estonia - a country where they have had problems with regulators (according to them undeserved), but they also say that they have seen what could happen if one company outperforms all others and becomes a center of attraction itself.

"Today in Estonia there are no counters, no paper, all communication with the state administration, incl. voting takes place online. This became possible not only because there was political will for reforms, but mainly because of the so-called "Skype effect" - some entrepreneurs out of nowhere created one of the most recognizable companies in the world. This successful example opened the door to both reforms and the creation of a huge ecosystem of entrepreneurs, investors and related university programs, and today Estonia is the country with the most unicorn companies per capita in the world. Here at Nexo we believe that this is how things can happen in Bulgaria, but we need a positive, contagious example. A success that you can't say anything about - they just succeeded - yes, probably with a dose of luck, but mainly thanks to a lot of hard work, without venture funds, without European subsidies, without public procurement, without communist briefcases. If they can, anyone can. We want Nexo to be this example, to make a "Nexo effect" in Bulgaria," concludes Kanchev.

Kosta Kanchev
Just before noon on 12 January 2023, an "international operation against a large-scale financial crime scheme" (according to the State Prosecution) hit the offices of the Sofia-based crypto bank Nexo. As we prepare a longer update for you, revisit Yoan Zapryanov's original inquiry into Nexo's business activities from last year.
Main takeaways
  • Bulgarian crypto bank Nexo is among the largest in the global industry and manages assets worth $ 10 billion
  • It operates in the unregulated world of cryptocurrencies, which currently allows banking without regulation
  • Nexo has faced difficulties associated with its own rapid growth, as well as customer claims, a lawsuit in the US, accusations of market manipulation and the unclear evolution of its business model

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