A family of fintech entrepreneurs has sued Nexo, the major crypto exchange. The grounds appear to be that the company prevented the withdrawal of funds and then intimidated the investors themselves into selling them back to the company at a discount.
Trouble for Nexo, the crypto company under the microscope
The lawsuit was filed in the London-based High Court, the three investors in the fintech group claim Nexo failed to allow the withdrawal of more than 107 million pounds (the equivalent of about $126 million) of cryptocurrency. The entrepreneurs belong to the Morton family, a well-known British business family.
Brothers Jason and Owen Morton and their cousin Shane Morton, complain that Nexo froze their accounts subsequent to the British investors’ attempt to withdraw their assets. Given the reports of the lack of transparency of various crypto companies and corporations, the British family did not feel safe keeping such a large investment and had decided to get out of the investment.
According to High Court documents released in statements by the Morton family, in addition to Nexo’s attempt to freeze the funds, the family was also intimidated by Nexo with the aim of buying from investors the Nexo token at a discounted price.
If this is true, it would be most serious for Nexo.
The fund of the three Morton investors, contained millions of pounds in Nexo cryptocurrencies, Nexo Tokens and tens of millions more in Bitcoin, Pax Gold and Stellar.
The Mortons’ particular concerns were regarding Nexo’s structure, its regulatory status with the UK Financial Conduct Authority (FCA), and the extent to which the sum of all Nexo tokens was owned by Nexo employees.
These concerns of the investor family, which has now been forced to file a lawsuit, had already been expressed to the Nexo company, back in December 2020.
But an unsatisfactory response from Nexo executives meant that in March 2021, the Mortons decided and tried to sell their Nexo tokens in order to withdraw all of their initial investment of £126 million.
However, their withdrawal attempt was bitterly blocked, first by imposing a withdrawal limit at $150,000 per day. Then on 23 March 2021, Nexo completely blocked the entrepreneurs from withdrawing their assets, freezing their funds and their ability to attempt to withdraw.
Subsequently, with unclear explanations as to why the assets were frozen, Nexo executives offered the Morten family to sell their tokens to Nexo at a 60% discount to their next price. The Mortens were almost forced to accept, but some time later, certainly after hearing multiple legal opinions, they decided to intimate a lawsuit in the High Court in London.
Nexo and its products are challenged as not solvent
After the news of the lawsuit in London, there is no end of trouble for Nexo, which this time is under the radar for its crypto products. Indeed, although the co-founders have already assured that the platform is solvent, many crypto experts have refuted these claims stating that Nexo and its products cannot be solvent, especially after the FTX collapse.
Cryptocurrency analyst Dylan Leclair has questioned this, namely Nexo’s rate of return compared to the average decentralized finance (DeFi) market.
“If the return is greater than the ‘risk-free’ market rate, they are by definition taking directional risk in pursuit of said ‘return’.”
The fact that companies such as Celsius, BlockFi, Voyager, and Vauld, which serve the same function as Nexo, have been bitterly affected since the FTX collapse, whereas Nexo does not seem to be taking the hit, puts the analyst in a quandary.
LeClair argues that through user-backed loans, Nexo earns interest at a rate higher than the yield offered. The problem here is that in a system without a lender of last resort, the commercial banking model on crypto rails can explode, quickly. Moreover, the fact that Nexo, controls over 82% of the total supply of its tokens, does not bode well for the analyst.