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Nexo High-Yield Bearing Crypto Products Come Into Question As Market Deflates

2 mins
Updated by Kyle Baird
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In Brief

  • Nexo has come under the microscope for its high-yield-bearing crypto products.
  • Analysts argue that Nexo's double-digital yields can't be sustainable.
  • Regulators, including the U.S. SEC, have clamped down on similar products over the last year.
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Nexo has come under the radar for its high-yield-bearing crypto products when the broader market remains weak. The concerns come a month after the co-founders assured that the platform is solvent.

Several crypto commentators took to Twitter to point out how Nexo’s double digital yields couldn’t be sustainable—especially considering the recent collapse of crypto exchange FTX.

Nexo offering questionable rates

Crypto analyst Dylan Leclair questioned how Nexo is managing higher yields of 10% while “every counterparty in the crypto space has blown up,” His argument is based on Nexo’s rate of return against the yield of treasury bills and the average decentralized finance (DeFi) market.

LeClair explained, “If the yield is greater than the ‘risk-free’ market rate, they are by definition taking a directional risk to chase said ‘yield.’

According to the analyst, it could also be said about any other company in a similar position.

Other crypto lenders like Celsius, BlockFi, Voyager, and Vauld have been victims of the so-called ‘crypto contagion,’ after the collapse of FTX.

Watchdogs remain wary of lending products

The United States Securities and Exchange Commission has clamped down on similar products over the last year. For instance, BlockFi had to remove its initial yield-bearing offering after a $100 million settlement with the SEC. Recently, fintech company Block Earner was also sued by the Australian Securities and Investments Commission (ASIC). The regulator contends that the company’s yield-earning products essentially function as unregistered financial services.

With regulatory clarity still missing for crypto lending products, Nexo is facing more problems. The London-based crypto platform was pulled to the court for allegedly preventing three investors from withdrawing more than $126 million worth of crypto in 2021. The platform is accused of coercing them into selling their holdings at a 60% discount.

Recent lawsuit and face-off with regulators

Over the past months, the California Department of Financial Protection (DFPI) and seven other states issued a cease and desist order against Nexo.

After this, co-founders Antoni Trenchev and Kalin Metodiev assured that the platform doesn’t face any liquidity troubles and remains resilient. Metodiev had added, “Insolvency, bankruptcy is nowhere in Nexo’s reality,”

LeClair argues that through collateralized borrowing from users, Nexo earns interest at a rate higher than the return offered.” The problem here is that in a system with no lender of last resort, the commercial bank model on crypto rails can blow up, quickly,” he adds.

“Liquidity issues,” and then doors close,” LeClair explained. Taking the instance of the Terra debacle, the analyst reminded, “Get your coins away from counterparties. ESPECIALLY if you are lending it for a yield..”

The analyst also emphasized that the company controls over 82% of the total supply of its tokens. Meanwhile, another crypto commentator pointed out that 85% of Nexo’s total assets held on Ethereum are NEXO tokens. This means that the platform’s backing could become compromised if liquidity issues mount.

That said, as the FTX exposure is still coming to light, the market sentiments remain weak. The global cryptocurrency market cap at the time of writing remains close to $855 billion on CoinGecko.

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Shraddha Sharma
Shraddha is an India-based journalist who worked in business and financial news before diving into the crypto space. As an investment enthusiast, she has also has a keen interest in understanding crypto from a personal finance standpoint.