The cryptocurrency world continues to shake up in drama and investigations following the failure of the crypto exchange FTX and Terra/Luna. At the center of the latest situation is the UK-based crypto lender Nexo, which is experiencing a lot of setbacks.
Raided in Bulgaria
Nexo's offices in the capital, Sofia, were raided last Thursday by a team of over 300 prosecutors, investigators, and foreign agents, according to local news agencies. Charges include violating taxes and money laundering, creating an organized crime ring, violating global financial sanctions on Russia, and operating without a license.
Siika Mileva, a spokesperson for the country's prosecutor-general, said they have also established that an individual formally identified for financing terror activities used Nexo for transferring crypto but did not go into detail.
Local police have searched 15 locations linked to Nexo while multiple international agencies are investigating Nexo.
In a series of tweets, the struggling cryptocurrency company said it cooperates with relevant authorities and regulators. Nexo also reaffirmed it has been complying with anti-money laundering (AML) requirements and sanctions imposed on Russia, as well as cooperating with leading cryptocurrency intelligence firms such as Chainalysis.
The crypto lender further clarified the raids were targeting a Bulgarian entity in the group, which is not client-facing, and only has back-office functions.
“Unfortunately, with the recent regulatory crackdown on crypto, some regulators have recently adopted the kick first, ask questions later approach. In corrupt countries, it is bordering with racketeering, but that too shall pass,” it added.
Nexo is now readying to sue Bulgaria over damages caused by the sudden stoppage of the police.
Threatens lawsuit over ‘political raid'
The Bulgarian news agency reported that the embattled crypto company complained about law enforcement's reaction to the ongoing probe into the company — calling it shameful — and is preparing to file a lawsuit against the government seeking damages. Nexo officials think winning a lawsuit would make up for Nexo's losses from the raid on its offices.
The hundreds of millions of compensations that Bulgaria will be forced to pay after losing to Nexo in court will break records, the company said in a statement, adding that, unfortunately, this time, it will be Bulgarian taxpayers who foot the bill.
A day after the raid, in its statement, Nexo said that the raids had been linked to political campaigns by the “tabloid media.” One party it has been linked with is “We Continue the Change” — a centrist, anti-corruption political party currently the second-biggest in Bulgaria's parliament. The other one is “Democratic Bulgaria,” which is an electoral alliance between three parties; The Greens, Democrats for a Strong Bulgaria, and Yes, Bulgaria!
“Guided by an active civic stance,” Nexo's team members also donated to political parties in a transparent and lawful manner, the crypto lender said in its statement.
Spokesperson Siika Mileva, however, said that there is no political aspect to the investigation into Nexo, adding that “it has become a national sport to attack the institutions.”
Nexo further condemned the actions of local authorities in Bulgaria as illegal, saying it shows the incompetence of those involved. The company called the actions local Bulgarian arbitrariness and said they were designed to harm and exploit a successful business.
The crypto lender mentioned that they have paid out tens of millions of BGN in taxes and insurance. It also clarified that Nexo doesn't offer any services for Bulgarian residents due to potential issues with the local government. It then reiterated that it has been compliant with AML requirements and sanctions against Russia.
Withdrawals after raid cause for worry?
The news has certainly spooked investors, with funds flowing away from Nexo. According to the snapshot of Nexo's real-time attestation provided by Nexos auditor Armanino on their website, the company held 133,263 Bitcoin on the day the offices of the crypto lender were raided in Bulgaria. In a matter of a day since the raid happened, about 8,324 BTC ($158 million) were withdrawn from Nexo.
According to cryptocurrency analytics platform Arkham Intelligence, Nexo has seen hundreds of thousands of dollars in outflow. Blockchain tracking platform Cielo Finance also reported on significant withdrawals from the struggling company, specifically noting transactions of over $200,000 in USDC leaving the platform since Jan. 12.
Besides a “flood of customer stablecoin withdrawals,” the firm also noticed the Nexo treasury wallet moving around WETH, BNB, and stables on Polygon and BNB chains.
A spokesperson for Nexo, however, has denied any abnormal outflows of assets, saying that the current outflows are considered normal based on the current market conditions and that “it's all business as usual.” The representative added that the outflows have only accounted for 2% of Nexo's total assets under management, which is currently at $2.3 billion.
VASP Application Rejected in the Cayman Islands
The same week that Bulgarian authorities raided Nexo's offices, the crypto lender filed suit in the Cayman Islands.
Nexo filed the lawsuit on Jan. 12 against the Cayman Islands Monetary Authority (CIMA) for not approving its registration as a virtual asset service provider (VASP) in the island nation. The crypto lender argued that it was “suitable” to provide crypto services to Cayman Islands residents and asked the court to overturn the financial regulator's decision.
Nexo applied to the CIMA in January 2021, providing additional information as requested by the regulator, per court documents. However, last October, the monetary authority asked for clarification on the application, citing “certain legal and regulatory matters as noted in the news media” that Nexo had not disclosed. The application was rejected in December.
Nexo has accused CIMA of breaching its duty to provide sufficient detail in its decision to refuse the crypto lender's application. According to Nexo, CIMA placed too much weight on regulators who have filed enforcement actions against the company.
State-level regulators in the US have also filed cease and desist orders against Nexo, but the company argued in its lawsuit that they have been diligent in cooperating with all US state and federal regulatory inquiries. However, there remain regulatory ambiguities with respect to digital assets in the US, such that enforcement by regulators does not necessarily imply any wrongdoing, Nexo added.
Halted lending services in the US
Last month, Nexo announced a gradual departure from the US in the coming months and immediately halted access to its Earn Interest Product in eight states. Nexo stated that the decision to leave the US was “regrettable but necessary.”
This came after the platform stopped allowing new US customers access to its earn-interest products after the Securities and Exchange Commission (SEC) issued its guidance for crypto products offering interest in February 2022.
Nexo announced in early December 2022 that it had been in talks with both state and federal regulators in the US but that these talks had come to a “dead end.” The company also said it tried to “proactively modify its business” in response to the law enforcement agencies concerns but to no avail.
“It is now unfortunately clear to us that despite rhetoric to the contrary, the US refuses to provide a path forward for enabling blockchain businesses, and we cannot give our customers confidence that regulators are focused on their best interests,” the company in its official announcement.
Nexo further said that while regulators initially encouraged cooperation, the turmoil caused by FTX's collapse created “an impossible environment” for the company to continue operating.
Enforcement action filed against Nexo
Nexo's decision to pull out of the US came after it faced increased scrutiny from the regulators. The company was sued by New York State Attorney General Letitia James, claiming that the crypto lender deceived customers by saying that it was registered to sell securities and commodities and was not approved to offer services such as its Earn Interest Product.
State regulators in California, Kentucky, Maryland, Oklahoma, South Carolina, Washington, and Vermont have also taken action against Nexo Group, the parent company of the crypto lender Nexo, for offering customers accounts with earned interest without first registering it as a security and providing required disclosures.
These interest-earning accounts allowed investors to deposit assets with Nexo in exchange for earning returns of up to 36% on their deposits. But the California Department of Financial Protection and Innovation (DFPI) has stated that these rates are “significantly higher than the rate on short-term, investment-grade, fixed-income securities or bank savings accounts.”
Nexo attacks rival Vauld
Amidst a row of issues surrounding Nexo, the company announced last summer that it has been in talks with its rival Vauld for the full acquisition of the Singapore-based company after Vauld froze all customer withdrawals, deposits, and trading on its platform and hired advisers to explore a potential restructuring in the aftermath of the collapse of Celsius. Since then, the deal has hit several roadblocks, and Nexo has revised its proposal multiple times.
Tensions between the two crypto lending companies have been rising, with Nexo accusing Vauld in an open letter of not acting in the best interests of its creditors. Nexo said the company was rebuffing it and pushing for a “questionable” deal with an affiliated fund manager.
Earlier this month, Vauld rejected Nexo's final offer. Darshan Bathija, co-founder and CEO of Vauld, told Nexo in a private letter that his company would reject a final proposal put forward by Nexo. Bathija said that Nexo had failed to assess its solvency, expressing concerns over how Nexo would handle Vauld's U.S.-based customers as Nexo has stopped serving the country's residents.
Meanwhile, a Singapore court has extended Vauld's period of creditor protection to Feb. 28 because the company is yet to develop a revival plan. According to reports, Vauld owes more than $400 million to its customers based on crypto prices at the time of its collapse.
Is Nexo in more trouble than it can handle?
The cryptocurrency credit industry has been dealt a major blow, with many of Nexo's largest competitors, including BlockFi, Celsius Network, and Voyager Digital, filing for bankruptcy protection within the past few months. This makes Nexo's current situation more serious.
Last year, these crypto lenders and several exchanges experienced stress tests on withdrawals before their collapse, and following the raid, Nexo is experiencing similar issues. However, it is unclear at the moment what will be the result of the Bulgarian authorities' probe or what impact this will have on Nexo and its customers.
Crypto lender's native token, NEXO, however, has been unperturbed by all the problems Nexo is facing, at least for now. NEXO has been up about 15% in the past month and trading at $0.74, but down 69% in the last year and 82% from its all-time high (ATH) hit in May 2021. This uptrend in the NEXO token has been in tandem with the green recorded by the broad crypto market.