Understanding the Risks of Nexo Earn Interest Product

Nexo utilises its best efforts to ensure that the Nexo Earn Interest Product’s advertised Interest rates are stable. However, such rates may be subject to change from time to time. Previously provided Interest rates are not indicative of whether these rates will be maintained long-term. Therefore, Nexo does not guarantee a stable Interest rate at all times. The Nexo Earn Interest Product is not a registered security and is not offered as such. The typical investor protection associated with holding registered securities does not apply to clients using the Nexo Earn Interest Product. Nexo is not a depository institution, and clients' Savings Wallet balance is not a deposit account. The general risks associated with cryptoassets apply to the Nexo Earn Interest Product.

Below, you can find a breakdown of the risks associated with the Nexo Earn Interest Product.

Core Principles of the Nexo Earn Interest Product

The Nexo Earn Interest Product enables clients to lend their cryptoassets to Nexo in return for a predetermined yield. This yield is assured regardless of the specific activities undertaken by Nexo with the lent assets. Clients should clearly understand that their topped cryptoassets do not involve participation in a pooled fund. Thus, they do not benefit from collective profits or suffer from collective losses that may arise from Nexo’s various financial activities other than experiencing the typical market value fluctuations associated with cryptoassets.

Clients must note that the structure of this product ensures they do not partake in any profits derived from their lent assets, reflecting a corresponding benefit whereby they are also dissociated from potential losses borne by Nexo as a result of these activities, aside from the standard market risks inherent to cryptoasset holdings. This configuration is deliberately chosen to provide clients with a stable and predictable return, thereby minimising their exposure to operational risks that might otherwise affect their cryptoassets.

Nexo bears the risks associated with its investment strategies, and as such, it is important to note that it does not maintain a publicly accessible investment policy, nor does it disclose detailed information regarding the operational use of the lent assets. The management and operational strategies employed in handling the raised capital do not adhere to a publicly declared policy that outlines the generation of returns for clients. Any information Nexo chooses to disclose concerning these strategies is done voluntarily and is driven by Nexo’s commitment to maintaining transparency with its clients. However, this transparency does not extend to providing detailed public disclosures of each specific action taken with client assets. These disclosures are made at the discretion of Nexo and are intended to balance the company's principle of transparency with the need to protect sensitive operational details that, if publicly shared, could undermine the strategic interests of both Nexo and its clients.

By participating in the Nexo Earn Interest Product, clients affirm their understanding and acknowledge that this arrangement has been designed with their best interest in mind, aligning with their personal goals and risk tolerance. Clients are encouraged to review these risk warnings and all sections below carefully and consider how the non-disclosure of specific operational activities might affect their strategy.

Interest Generating

In line with Nexo's commitment to transparency, when a credit is facilitated by the client to Nexo, the latter may partake in but is not limited to, the following actions: convert, exchange, swap, pledge, re-pledge, hypothecate, re-hypothecate, sell, lend, stake, or otherwise transfer, dispose of, invest or use any amount of any cryptoassets.

Any such action will be performed in Nexo’s name only, and the client will have no benefits from it. Nexo may utilise diverse treasury management strategies, elected and compiled at Nexo’s sole and absolute discretion, including but not limited to the utilisation of funds for institutional lending and liquidity provision, interacting with third parties, such as decentralised blockchain applications and protocols (“DeFi Protocols”). Nexo employs due diligence practices when electing DeFi Protocols and interacts with said DeFi Protocols with reasonable care.

While Nexo adopts a best-effort approach to risk management, and notwithstanding a degree of care applied by Nexo in electing and compiling the above strategies, all arrangements made by Nexo as part of such strategies involve counterparty risks, which might impact Nexo.

The client must understand and agree that all risks, not exhaustively listed herein, associated with Nexo’s treasury management arrangements may directly affect Nexo's integrity. This includes but is not limited to the risk disclosed in the Liquidity risk section below.

Price Volatility Risk

The value of cryptoassets utilised in the Earn Interest Product can increase or decrease over time, causing significant fluctuations. However, mainly due to the novelty and uncertainty associated with cryptoassets, the latter tend to exhibit higher volatility compared to most fiat currencies and other assets. This price unpredictability could lead to substantial losses over a short period of time, leading to overall loss affecting Earn Interest Product participants, regardless of whether interest was generated.

Fixed Term Restrictions

Nexo Earn Interest Product offers clients the opportunity to engage in Fixed Term, a feature designed for clients intending to facilitate Nexo with credit in order to generate interest on their cryptoassets over a specified period. Once the client commits their cryptoassets to a Fixed Term, the funds are securely locked and remain inaccessible until the term's expiration. This locking mechanism is crucial for maintaining the integrity of the term agreement and ensures that the cryptoassets cannot be withdrawn prematurely, which action may have otherwise been unilaterally undertaken by the client for a variety of reasons, including inter alia to protect themselves against losses that might arise from sudden fluctuations during volatile market conditions or unexpected personal financial needs. By entering into a Fixed Term, the client understands and acknowledges that the credit facilitated to Nexo may not be called prematurely and that Nexo is not obliged to unlock and consequently return any cryptoassets locked in a Fixed Term until the end date of such Fixed Term.

Additionally, while clients' funds are in a Fixed Term, they are restricted from being automatically or manually utilised for the repayment of any debt obligations that the client may have towards Nexo that might have arisen from the ordinary use of their account. Moreover, the funds in a Fixed Term are not eligible to serve as collateral or be used for loan repayments until the term has fully concluded and the funds have been unlocked and released back into their account. This may lead to unwanted liquidation, and clients should not rely on the cryptoassets locked in Fixed Terms when performing their personal risk assessment.

Nexo provides an option to override the Fixed Term locking feature in case of nearing liquidation. That is an opt-in feature that is disabled by default, which means that clients have to manually enable the 'Unlock Fixed Terms' option within their account settings. This feature provides a layer of control, allowing the client to decide whether or not their funds locked in a Fixed Term should be made accessible to serve as extra collateral in order to improve the LTV ratio and thus prevent automatic loan repayments. With the Unlock Fixed Term feature enabled, using locked terms for liquidation prevention purposes occurs automatically, in which case, upon unlocking the Fixed Term, all interest generated to this point is forfeited. Clients using Nexo’s credit-based products must bear in mind that, as a result of market volatility, amongst others, enabling the Fixed Terms lock override may result in the loss of any generated interest.

All the assets in each Fixed Term will be unlocked at once should the system need to collateralise part or all of the funds locked in the account. As a prioritisation measure to minimise the loss, Nexo’s Liquidation Engine will first try to find a single Fixed Term that is sufficient to prevent automatic loan repayments. If no such Fixed Term exists, Nexo’s Liquidation Engine will instead unlock a minimal number of Fixed Terms with the least earned interest in ascending order. In any case, the accrued interest associated with each unlocked term will be lost.

No Compensation Scheme Coverage

The Nexo Earn Interest Product is not covered by any investor compensation schemes, such as the Financial Services Compensation Scheme or compensation schemes provided under Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investor-compensation schemes. As such, losses incurred in connection with the Nexo Earn Interest Product are not recoverable under these or similar schemes.

The Nexo Earn Interest Product is not covered by any deposit guarantee schemes, such as the guarantees under Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes.

Changes to the Offering

Nexo has the right, at its sole and absolute discretion, to discontinue the support of the Nexo Earn Interest Product and any related products at any time and for any reason. This right to discontinue or alter the product extends to all aspects of the Nexo Earn Interest Product, including but not limited to the modification of terms, reduction of interest rates on FLEX and Fixed Terms, or the cessation of the product altogether.

Clients should be aware that participation in the Nexo Earn Interest Product carries significant risks. The decision to modify or discontinue the product can be driven by various factors beyond Nexo’s control. These factors may include, but are not limited to, fluctuations in market demand, changes in the regulatory environment that govern cryptoassets, the performance and reliability of trading platforms, and shifts in public perception of the Nexo Earn Interest Product specifically or the broader cryptoasset industry in general.

Moreover, changes in the regulatory landscape can significantly affect the legality, permissibility, and practicality of continuing the Nexo Earn Interest Product. Such regulatory changes might limit or entirely preclude the availability of the product, impacting its operation and the benefits it offers to clients.

The potential for these changes necessitates that clients carefully consider their actions, recognising that the future availability and functionality of the Nexo Earn Interest Product may be constrained or altered at any time, resulting in possible changes to the benefits they receive. The discontinuation or modification of the product could occur with little to no notice and might significantly affect the ability of clients to continue earning interest on their cryptoassets as initially expected.

Compounding Interest

By default, interest is paid out in the same currency as the principal (e.g., BTC on BTC). When clients choose to receive interest payouts in-kind, the calculation of the accrued interest is based on the Annual Percentage Yield (APY), employing a compounding mechanism. This method involves adding each day's interest earnings to the principal, which then forms the base for calculating the subsequent day's interest. Alternatively, clients may opt to receive their interest payout in NEXO Tokens. Interest paid out in NEXO Tokens, while generally higher in terms of annual percentage rate, accrues on a daily basis using simple interest mechanisms - Annual Percentage Rate (APR).

The daily interest accrual, when earning in-kind, is executed by converting the APY to an APR, which is a simple interest rate, in general, resulting in a lower daily unit payout as compared to a compound annual interest payout. This difference is a result of the compound interest principles, where the effective annual rate increases as interest accumulates on both the initial principal and the accrued interest throughout the year.

This means that the daily interest rate (APR) might initially seem lower than the visualised annual interest (APY). This discrepancy is due to the nature of compound interest, where the effective annual rate grows as interest accumulates on both the initial principal and the accrued interest.

To realise the full benefits of the APY as presented on the Nexo Platform, it is essential for clients to maintain both the initial principal and the accrued interest in their account for a complete 365-day cycle. Withdrawals or modifications to the principal amount during this period can interrupt the compounding process, potentially leading to a lower annual interest. Clients should consider these aspects carefully when planning any withdrawals or adjustments to their cryptoassets.

All savings presentations, including tables and rates on the Nexo Platform, are based on the compounding interest mechanism. This approach aims to illustrate the potential growth of cryptoassets over a year, assuming there are no withdrawals or changes to the principal.

Cool-off

Upon toping into the Nexo Earn Interest Product, cryptoassets are subjected to an initial cool-off period during which they are marked as non-earnable, indicating that no interest will be accrued for the duration of the cool-off period. This is a standard procedure to ensure the integrity and security of both the assets and the platform. Each day, at a predetermined timestamp, cryptoassets that have completed this cool-off period are transitioned to an earnable status.

Interest accrual for these assets begins only after they are declared earnable, which is confirmed during a daily snapshot taken at this specific timestamp. Due to this mechanism, the timing of the first interest payment on newly topped funds can vary. Specifically, clients may observe that the initial interest payment could be made anywhere from 24 to 52 hours following the top-up of the cryptoassets into the Savings Wallet. The exact timing of this first interest accrual is dependent on the moment the top-up is made relative to our established daily processing cycle.

Assets transferred to the Savings Wallet from another Nexo platform wallet, such as the Credit Line Wallet, are subjected to the same initial cool-off period ranging from 24 to 52 hours.

This structured approach to handling cryptoassets and initiating interest payments is designed to enhance transaction transparency and maintain rigorous controls. It ensures that all assets are accurately accounted for and that interest payments are initiated based on the precise timing and status of each cryptoasset as per our internal scheduling protocols.

Clients engaging with the Nexo Earn Interest Product are advised to take note of these timelines and procedures to align their expectations with the platform's operational framework.

Information Materials

All materials associated with the Nexo Earn Interest Product are for general information purposes only and not intended as financial or investment advice, offer, solicitation, recommendation, or endorsement to use any of the Nexo Services and are not personalised or in any way tailored to reflect a client’s particular investment objectives, financial situation or needs.

Information presented about cryptoassets and provided yield when used in conjunction with the Earn Interest Product should not be perceived in a vacuum, independent of the overall crypto sector. Nexo is not responsible for the cryptoassets market, and we make no representations or warranties concerning the real or perceived value of any cryptoassets and the quality, suitability, usefulness, accuracy, or completeness of any data provided.

The client shall, therefore, carefully consider whether holding particular assets or locking them in Fixed Terms is the right approach for them in light of their financial condition. Note that the client should not have funds invested in cryptoassets or speculate in cryptoassets that they are not prepared to lose entirely, as there can be a substantial risk that they lose money even when holding cryptoassets.

Liquidity Risk

Due to the early stage of development of cryptoasset markets and the lower adoption rate compared to traditional financial instruments, clients should note and be prepared to bear the consequences of unpredictable liquidity shortages, which can reflect in the operations of companies like Nexo that provide services related to these assets.

Liquidity risk is a critical concern for any cryptoassets institution, including Nexo. This risk is characterised by the possibility that Nexo may not be able to efficiently meet its expected and unexpected current and future financial obligations without impacting its regular operations, incurring significant losses, or being unable to convert cryptoassets into fiat currency at the time of a client's request. In scenarios of a heightened liquidity shortage, Nexo may need to place restrictions on clients' ability to withdraw their holdings at their convenience. Furthermore, there may be limitations on clients' ability to receive their holdings in the same cryptoassets or in the desired fiat equivalent.

Save for the exceptions described in the preceding paragraphs, it is crucial to understand that while the interest payments under the Nexo Earn Interest Product constitute Nexo’s contractual obligation towards the Earn Interest Product participants, the actual accessibility of clients' assets during periods of liquidity constraints or insolvency may be limited. This could restrict clients' access to their funds until appropriate resolutions are achieved through necessary legal or operational proceedings.

To manage and mitigate these risks, Nexo adheres to stringent liquidity management protocols. These include maintaining minimum levels of liquidity necessary to meet financial obligations and ensure business continuity. The core of this strategy involves rigorous cash flow management, which is pivotal in monitoring and controlling the inflows and outflows of funds. Additionally, Nexo conducts regular stress tests to assess the resilience of its financial position under various scenarios, thereby ensuring that it remains robust enough to handle unexpected financial strains.