On the Temporary Suspension of XRP Credit Line Exchange and Repayments Following SEC’s Action Against Ripple Labs

6 min read
  • On December 22, 2020, the SEC filed a lawsuit against Ripple Labs and its founders, claiming that XRP is a security
  • Nexo was among approximately 30 leading companies to cease exchanging XRP in view of regulatory uncertainty as to XRP’s nature, temporarily suspending credit line repayments in XRP
  • The actions undertaken by Nexo, upon legal counsel, were in adherence with laws, regulations, and the company’s own terms and conditions, and intended to protect the business and its clients
  • As a result of the SEC’s action, the price of XRP decreased dramatically, resulting in the liquidation of a small number of clients, who failed to add sufficient collateral to maintain their XRP-backed credit lines
  • XRP withdrawals and top-ups remained available on the Nexo platform at all times and to all users
  • Nexo has been subjected to defamation and aggressive blackmail attacks via various media and communication channels by several former clients liquidated as a result of the December 2020 XRP crash
  • As attempts to settle amicably were not accepted by the individuals in question, Nexo is taking legal action to address the matter
  • The company asserts that any further attacks upon its reputation, including any meritless lawsuits, will be addressed with equal severity and through the applicable legal instruments and mechanisms

One of the reasons Nexo has sustained an impeccable reputation throughout the years is that it always places its adherence to the highest regulatory standards and the protection of its clients’ interests first, thus acting in the mutual benefit of all parties involved. Nexo is actively demonstrating this through constant, open, and transparent communication with its clients on all matters surrounding their use of Nexo’s services.

To comply with the applicable laws and regulations in the jurisdictions Nexo operates in, we are obliged to consider all events in the blockchain space that may have an adverse effect on our regulatory status and business operations, and expose the company to significant risks, including but not limited to any administrative and court proceedings involving digital assets supported by Nexo.

As information concerning actions initiated by the SEC against Ripple Labs Inc. and its founders emerged on December 22, 2020, followed by court proceedings – events that will undoubtedly cause significant uncertainty as to the treatment of XRP and transactions with it for the foreseeable future – upon advice by its legal counsel Nexo had to undertake the necessary actions to protect its clients and business by temporarily suspending credit line repayments in XRP, the withdrawal of new XRP-backed credits, and the standard Nexo exchange service related to XRP.

We were one of approximately 30 leading companies in the blockchain space, including but not limited to Coinbase, Genesis Global Trading and Binance, to recognize the substantial risks stemming from the proceedings launched against Ripple Labs and to undertake similar measures.That same month, Grayscale removed XRP from the Digital Large Cap Fund. Pending clarity on XRP’s nature and future prospects as per the SEC’s lawsuit, we took action so as to handle the situation properly and compliantly, and to prevent any negative consequences for Nexo’s business and clients’ assets.

With the SEC’s December 2020 claim centering on XRP’s purported status as a security, which would require all entities exchanging it to hold a specific license, those entities that chose to comply, Nexo included, delisted or ceased exchanging the asset.

The reason XRP repayments – as a particular transaction type – were temporarily suspended is that repayment, by its nature, constitutes a type of exchange service offered by Nexo. Both the repayment and the standard Nexo Exchange service are initiated by a client’s order to Nexo to execute an exchange transaction, with the proceeds of the latter serving different purposes, including for Nexo crypto credit line repayments. XRP withdrawals and collateral top-ups remain available to all users at all times as they do not constitute an exchange.

Moreover, it is clearly stated in the Nexo Crypto Credit General Terms and Conditions (the “GTC”), which govern Nexo’s contractual relations with all users of its cryptocurrency credit facilities, that certain rules may occasionally apply to repayments, as also indicated on the Nexo platform. Under the circumstances referred to in this statement, Nexo’s clients could have used any digital asset approved and supported by Nexo in lieu of XRP:

  • to repay their Nexo crypto credits, and/or
  • to provide additional collateral to prevent liquidation.

If Nexo’s clients wish to use their XRP outside the Nexo platform, they can withdraw it, as is the case with any other asset they hold.

The liquidations that ensued from users failing to repay their credit lines or post additional collateral as the value of their XRP collateral decreased, however, are different in nature. Liquidations are a procedure laid out in the GTC and are automatically triggered by Nexo should the LTV increase above the maximum permitted threshold of 83.3%. Considering that, as per the GTC, Nexo effectively liquidates collateral backing credit lines from its own accounts when that crypto credit is outstanding, when liquidations occur Nexo disposes of its own digital assets rather than rendering services to its clients, as is the case with repayments and the standard Nexo Exchange service.

Furthermore and as explained in detail in our dedicated article, liquidations – while distressful to clients and undesirable for Nexo – serve to protect our interest-earning clients, whose assets we hold on the platform, as well as to ensure a healthy, risk-free balance between the lending and savings lines of our business. As an institution that follows best practice, we use the funds received from our Earn on Crypto & Fiat suite to finance crypto-backed loans, meaning that assets used as collateral that do not hold their value may place a strain on earning clients unless liquidated.

The actions Nexo undertook as a result of the SEC’s lawsuit against Ripple Labs and its founders were thus in full compliance not only with all applicable laws and regulations, but also with the contractual provisions governing Nexo’s relations with its clients.

With this in mind, we deem all adverse actions, legal and otherwise, taken against Nexo vis-a-vis its handling of XRP following the SEC lawsuit to demonstrate a complete lack of understanding not only of the contractual arrangements between Nexo and its clients, but also of laws and regulations, and of how markets operate.

A small number of former Nexo clients have groundlessly and aggressively attacked Nexo and its employees since late December 2020, and organized and incited the spread of malicious, inaccurate, misleading, and unfounded information online, including by paying other persons to do so. These actions included petitions against Nexo, the creation of merchandise with Nexo “FUD” and, not least, the posting of false reviews about Nexo and its services by paid third parties, causing damage to Nexo’s reputation.

It is unlawful for an individual to make deliberate statements or incite other persons to do so that intend to harm the reputation of a business without any factual evidence and, as such, we are seeking full indemnity for the reputational damage we have suffered. Our decision to do so comes after several attempts at settling disputes amicably, including – most recently – a cease and desist letter, requesting that the individuals deliberately attempting to damage Nexo’s reputation refrain from further disparaging, defaming, and discrediting the company, its management, employees, products and services publicly.

It is unfortunate that the individuals in question failed to meet our requests, forcing us to transfer the matter to our legal counsels to ensure our rights and hard-earned reputation are protected by all legally available means.

Finally, we would like to once again express our regret that certain XRP holders suffered losses as a result of the XRP crash ensuing from the SEC action late last year. We continue to follow the situation closely and will consider reactivating XRP repayment and credit withdrawal options if and when there is further clarity on the SEC’s stance vis-a-vis Ripple Labs, its founders, and XRP. In the meantime, our customer support team remains committed to assisting affected clients as per Nexo’s terms, conditions and policies.

As Nexo’s offering and business expands and, notably, as we edge closer to acquiring a banking license, strictly adhering to all laws, regulations, and best practice is of the utmost importance and no exceptions to the rule will be made. Like any sizable company firmly committed to following these principles as a pillar to our growth, we are accustomed to and expect there to be missguided and unjustified claims against us. We will continue countering such claims with all the instruments granted to us by the law to protect the interest of the company and its clients and to maintain Nexo’s impeccable reputation.