In the wake of Terra’s Luna ($LUNA.X) and TerraUSD ($UST.X) collapse, one of the most well-known crypto-centric hedge funds, Three Arrows Capital (3AC), likewise crumbled. But it didn’t stop there.
Collateral damage (pun intended) from 3AC’s downfall saw some of the biggest names in the crypto lending business rupture and shatter: Celsius ($CEL.X), Voyager ($VGX.X), Genesis, BlockFi ($BLOCKFI.P), and a myriad of other companies and crypto exchanges.
However, there was one major name in the crypto lending space that didn’t collapse – Nexo ($NEXO.X).
The Litepaper reached out to Nexo with some questions about what happened with the crypto lender collapse and how Nexo was able to stay away from most of the damage.
George Manolov, Business Development Executive at Nexo, was gracious and badass enough to, um, lend us some time.
First things first: who started Nexo, and what was the reason for starting it?
“The idea behind Nexo was put together as early as 2016 by one of the co-founders – Kosta Kantchev. The company itself was formed in 2018 and commenced operations in April that year. The founding team consisted of seasoned fintech industry professionals and talented software developers with the visionary approach to allow people to borrow funds against their cryptocurrency assets without selling them.
This would allow those with a firm belief in the upside potential of crypto to access liquidity in traditional fiat currencies while retaining ownership of their digital assets and thus the prospect for even further gains when the markets continue to grow.
In essence, Nexo was born out of the need some of the founding team members faced – the need for crypto-backed credit. As soon as the realization hit that there was nothing even remotely similar on the market, the hard work began, resulting in the creation of Nexo’s signature Instant Crypto Credit Lines.”
Let’s jump right in – WTF happened with Three Arrows Capital, Celsius, and others? How did Nexo weather the crap storm that occurred?
“We’d like to point out again this is an incredibly unfortunate turn of events with resounding effects on the entire industry, and we feel for end-users specifically who currently cannot access their funds. This should’ve never happened, and this is not what crypto is about.
From what has been revealed officially in the media from those companies’ spokespersons and some investigative work, it seems the plain and simple answer is non- or undercollateralized loans. Another reason circling the space is that huge amounts of client capital had been deployed, not only in lending but in riskier DeFi protocols, which offered extremely lucrative returns, but questionable security and yield-generation models. This is why we turned attention back to the most fundamental aspects of risk management and loan collateralization.
We also have some of the most experienced and reputable companies in the space as partners to weather this out together with custody and enhanced insurance policies. From the get-go, Nexo and our founders have adopted a more conservative approach in managing company assets, which has helped us accumulate capital that would help the company sustain severe market downtrends like the one we are currently experiencing.
We fully understand the cryptocurrency markets display cyclicity in their behavior – while bull runs cannot continue infinitely, this is also not the first bear market Nexo has been through. Our vision and efforts have always been to achieve a business model functioning equally well in both growing and contracting markets.”
So how does Nexo keep customers’ deposits safe from situations like Voyager and Celsius? What kind of protections do customers have?
“Our approach and efforts in safeguarding customer funds have been consistent since our establishment. We’ve had to make little to no adjustments following the 2022 crypto winter, and this safety-first attitude has allowed us to remain in a financially comfortable position.
Nexo protects user funds from both a security and operational standpoint. We partner with some of the most renowned and qualified asset custodians, such as BitGo and Ledger. On a customer level, Nexo employs 2FA authentication, withdrawal confirmations and log-in alerts, biometric identification, dedicated 24/7 customer support via chat or e-mail, and address whitelisting.
On a business level, we simply never lend capital without 100%+ in collateral, period. This has proven to be, time and again, the single most efficient solution to counter and avoid liquidity issues that could trickle down to our end-users and affect Nexo’s business operations. This is evident on a daily basis from the real-time audit (Litepaper note: Anyone from Tether ($USDT.X) reading this? Not that hard to get done.)Armanino LLP performs on our liabilities and assets under management – the former are covered by at least 100% in collateral. Our teams perform extensive due diligence and are very conservative when deploying capital in the DeFi space.”
Thanks for clearing that up. So what does Nexo do? Are you primarily a lender, or are you an exchange?
“In its earliest days, Nexo was a cryptocurrency lending platform, but the company has grown exponentially over the last 4 years to offer a broad range of digital asset management solutions for both retail individuals and institutional clients.
Nexo strives to provide end-to-end services with seamless and secure access to digital assets for our clients to explore and utilize to their benefit. Our retail users can purchase, store, and swap over 40 leading cryptocurrencies in their Nexo wallet. They can also borrow against and earn interest on their assets.
The Nexo Booster brings exciting leverage opportunities to more advanced investors, while the Nexo Card truly makes the world your oyster, allowing you to spend your crypto without selling it all over the world at any of the 90+ million merchants that accept Mastercard.
Our corporate partners also benefit from the 360-degree product suite that Nexo Prime, Nexo’s institutional branch, offers with tailored OTC services, advanced custodial solutions, as well as digital asset lending and trading solutions that bring flexibility to our partners’ operations.”
Would you consider Nexo DeFi (decentralized finance) or TradiFi (traditional finance)?
“Nexo arguably has elements of both as we try to bring the best of both worlds, so categorizing ourselves as either decentralized or traditional finance is, on one hand, inaccurate and, on the other – missing the point.
What would best describe Nexo is a bridge between TradiFi and DeFi, all in a regulated, secure platform, so clients wishing to switch from traditional banking services and explore the opportunities decentralized cryptocurrencies bring can do so safely and easily with Nexo.
Regulation is absolutely paramount for us in the sense that we’re determined to abide by any relevant legislation, which will bring stability and predictability to the entire space, and thus would allow for our sustainable operations.
The 40+ registrations and licenses we hold with regulatory bodies from all over the world are a testament to our resolve to provide products and services in accordance with all legal frameworks. At the same time, we are open to and actively seek out dialogue with regulators when it comes to implementing legislative changes.
So when it comes to regulatory compliance, Nexo does share similarities with traditional finance in our strict KYC (know-your-customer) and AML (anti-money-laundering) policies.
However, our platform features a range of products and assets that are native to decentralized finance. For example, while our Instant Crypto Credit Lines are effectively a credit service, there are no credit score checks or monthly repayments – as long as our clients have the collateral for the loan and they are free to acquire their capital immediately.”
What is the most important responsibility Nexo has?
“The responsibility of all of our efforts is ultimately centered around our clients, who trust Nexo with their hard-earned money. And it’s not only a responsibility, it’s what drives us to create secure and innovative products that Nexo clients can utilize and benefit from.
It’s why we put so much emphasis on risk management, over-collateralization, regulatory compliance, and independent, third-party audits with, in our case, reputable US accounting firm Armanino LLP.
This is also why we’ve temporarily suspended our Earn Crypto Interest product proactively in the US, pending further clarification and approval from the relevant bodies. The unrealized gains from that company decision were significant, but Nexo clients should rest assured this has all and only to do with staying on the right side of the law, so our operations remain safe and sustainable.”
Speaking of the interest suspension – any idea when staking rewards will be resumed for customers in the US?
“Arguably, this is one of the main questions both US-based users and companies in the space ponder on. But the reality is there is no way to know. We remain hopeful and ready to collaborate with all US regulatory bodies in regards to cryptocurrency yield products.
We’ve been in active contact with the SEC and anticipate further developments as it currently appears that it’d rather be the CFTC and not the SEC that would oversee the cryptocurrency regulation matters. “
What kind of due diligence does Nexo do before adding tokens/crypto/etc. to its platform?
“Nexo has a different business model to an exchange, which puts forward additional considerations when listing other projects.
Our asset listing policy is based on a discretionary decision, taking advantage of qualitative due diligence, market capitalization, and generated volume. Qualitative due diligence includes token economics, team and technology level, and market potential, but most importantly – the fundamental business model.
Our focus remains on listing quality projects which generate strong user demand and a dedicated community following. We are keeping up with the general market trends and try to focus on the different segments in the crypto space, such as DeFi, Metaverse, or Layer 1 Protocols, when the time is right.
Another important consideration is whether Nexo can safely offer a yield for the given cryptocurrency, with staking being the most predictable and sustainable long-term way to generate yield. This makes Layer 1 currencies with PoS consensus mechanisms a no-brainer to list.”
Does Nexo have a blockchain? If so, how does it work?
“Nexo is not a blockchain, rather the company operates through blockchain technology with integrations across multiple chains, including Bitcoin, Ethereum, Binance Smart Chain, Tron, Polygon, Avalanche, and many many others.
The NEXO token is a utility token, which grants holders certain rights and features, mainly preferable rates on our borrowing and earning products, where available. It operates via standards on two of the most popular networks – the Ethereum network with the ERC-20 standard and the Binance Beacon Chain network via the BEP2 token standard.”
Are there any interesting facts you can share about Nexo? For example, how much have you loaned out? Any interesting use of loans for major purchases?
“The demand for Nexo’s Instant Crypto Credit Lines was so strong when the product first emerged that we had a hard time sourcing liquidity to meet said demand. It was one of the more positive liquidity-related problems to have, but nonetheless – an issue that threatened our growth.
At the time when crypto was still so new and misunderstood, Nexo’s founders approached a few major Wall Street banking institutions to seek not funding per se, but rather liquidity. Unfortunately, no one returned our requests to meet or even to discuss opportunities.
It was for the better ultimately, since our co-founders then proceeded to conceive and launch Nexo’s Earn Crypto Interest product to ensure we had sustainable liquidity for our credit lines.
Fast forward a couple of years to the point when Nexo has grown to one of the leading companies in the space, and those same banking institutions were knocking on Nexo’s door to seek partnership in the booming sector.
We’ve processed over $80 billion on our platform to date. We’re proud to say we’ve had a client, a known sports person, who had taken out a loan against their crypto and went on to buy a house. Our users have successfully utilized Nexo to start businesses and acquire property in the past.
One such example is bitcoin enthusiast Brock Pierce, who became the first individual to take on a fully-crypto-backed mortgage worth $1.2 million to finance the purchase of real estate in Amsterdam. The deal was struck in November 2018, when Pierce put close to $3 million in bitcoin as collateral to take out the loan with Nexo.”
What makes Nexo better than other competitors in its space?
“Nexo has adopted a grassroots approach towards our business and the space we’re in. The strong fundamentals, securing Nexo an edge over the competition are our uncompromising risk management procedures, strict asset over-collateralization, $775 million insurance on custodial assets, and global licensing.
Our partnership with accounting and auditing specialists Armanino LLP is an industry-first move, which assures the assets always cover our liabilities under our management by over 100%.
Equally important is our team of dedicated and talented professionals in all the various areas, who’ve created the smooth, intuitive and secure platform our clients get to enjoy.
From the basic layouts, designed to deliver the most seamless UX to the deeply technical and automated mechanics of Nexo that make it perform reliably – it’s all been made possible by our team. Also, we can’t thank our community enough for their continuous support and constructive feedback. The rest is hard work and never giving up on our vision.”
Is there anything exciting and new coming soon?
“There is so much coming soon! Our teams are exploring solutions in the DeFi space, we have forthcoming upgrades on all of our products (particularly our wallet and exchange) to make them more flexible, reliable, and easier to maintain.
We’re actively engaged in both the regulatory and consolidation events in the current space, with promising M&A deals in the works. Overall, we’re excited and look forward to announcing some major positive news in the very near future.”