CeFi Crypto Platforms Risk Assessment: Nexo vs. Celsius vs. BlockFi | How Safe Is Your Investment In A Bear Market?

11 min read

A LOT has happened in the Crypto world over the last two month. The fall in the price of Bitcoin, which has lost more than two-thirds of its value since the highs of November, has dragged the entire sector into a serious crisis. This crisis has been exacerbated by the Terra Luna/UST crash – which wiped $40 billion from investors’ holdings – and the Celsius Network’s decision to freeze $11 billion in client assets due to liquidity problems. Adding to this, are the growing fears of a recession in the United States, and the recent interest rate hike – the largest since 1994.

Such shocking news, and at a rapid pace raise many concerns within crypto community, and make investors and HODLers wonder what could happen next. Let’s review the most popular CeFi Savings and Lending Crypto Platforms, including Nexo, Celsius, and BlockFi in the light of recent events, and take a close look at their potential risks, so that YOU can make smart investment decisions during this Bear Market.

Nexo

Key Statistics

  • $15B+ assets under management
  • 4M+ users
  • Available in 200+ jurisdictions
  • 40+ fiat currencies available
  • 200+ crypto pairs supported

Financial Health

Nexo appears to be a profitable company with sustainable business models and substantial liquidity and equity buffers. I say appears because Nexo is privately owned and their financial statements are not available to general public. Therefore, we can make conclusions about their financial health based on their actions.

Nexo offered to buy Celsius’ qualifying collateralized loan receivables in the wake of its liquidity difficulties:

In addition, in their June 19 dispatch, Nexo mentioned that they’ve been approached by “several household names in Wall Street banking and are in ongoing talks to help with the provision of liquidity for those facing solvency issues”.

Nexo is hiring to support business growth

Few days ago Nexo posted on their official Reddit :

Data from Craft and Nexo website confirms that Nexo is indeed hiring, and their Reddit post is not just a marketing gimmick.

craft.co/nexo

Note that Nexo is hiring while some of the main firms in the sector have announced a wave of layoffs attributed to the crypto winter. The US exchange platform Coinbase will sack 1,100 employees, the equivalent of 18% of the workforce. Gemini, a cryptocurrency exchange owned by the billionaire Winklevoss twins, will reduce its workforce by 10%, laying off 1,000 workers. The app Crypto.com will cut 5% of staff, or around 260 workers.

Real Time Reserves Audit By Armanino CPA LLP Shows Nexo Assets Exceed Liabilities

Nexo engaged Armanino CPA LLP, a Top 25 CPA & Consulting firm in the nation, for the purpose of offering its current customers, prospective customers, regulators, and partners additional transparency and assurance over the assets held as coverage to the liabilities Nexo has to its customers. Armanino CPA LLP conducts real-time reserves audit of Nexo assets and liabilities.

Note that Nexo is the only player in CeFi space that offers this level of transparency to their customers. Given a recent liquidity event at Celsius, it is likely that customers will expect the same transparency from other CeFi players in future before trusting them with their funds.

Top Notch Security

Nexo prides themselves on being the most security-focused digital assets institution.

  • $775 million insurance on custodial assets (increased from $375 million as of June 17) through partnerships with BitGo, Ledger, Bakkt, Fireblocks, and other top-tier custodians whose facilities are protected via a syndicate of insurers in the Lloyd’s of London and Marsh and Arch.
  • Diversified custodial infrastructure makes it exceptionally difficult for unauthorized parties to gain access to Nexo customers’ assets. Assets are held in a mix of hot and cold storage in various geographical locations.
  • Ledger’s institutional-grade security system, Ledger Vault, backed by $1 billion in crime insurance.
  • BitGo is backed by Goldman Sachs and is CCSS Level 3 and SOC 2 compliant.
  • Assets are stored in military-grade Class III vaults.
  • 2FA Authentication
  • Biometric Identification
  • Address Whitelisting
  • Nexo only loans assets to credit lines that are over-collateralized between 200-500%

Read more about Nexo’s security here

Reputation & Customer Satisfaction

Nexo has a 4.5 stars rating on Trustpilot, the highest among alll three players.

Risks

Extreme market conditions and more downside. Can Nexo weather the storm?

Nexo was founded in March 2018, and it hasn’t experienced a crypto winter to its full extent. By the time Nexo startup had launched, Bitcoin was already down to $9K from its $19K peak. The company has solid fundamentals and a healthy financial position. However, we don’t have a track record of Nexo performance under extreme market conditions.

It is worth mentioning, however, that Nexo team had 15 years of FinTech experience with Credissimo, before they launched blockchain-based lending four years ago. Their Credissimo team survived and thrived in 2007-2008, during one of the worst financial crisis of all times caused by unsecured mortgages. That’s probably why they have become so adverse towards unsecured and under-collateralized loans and take risk management seriously.

Related:

3AC Creditors Demand Access To Trading Accounts | Zhu Su & Kyle Davies Ties To Do Kwon Of Terra (LUNA)

Potential Exposure in DeFi

Celsius had a major impact from Terra Luna crash due to its significant investments in the platform. Nexo didn’t have any exposure to Anchor Protocol and Terra ecosystem, and in general it stirs clear from exposure to risky DeFi projects. However, Nexo doesn’t disclose where they invest their capital. Therefore, we don’t have any specific data to prove that Nexo has no exposure to any significant DeFi risks down the road.

Understanding Terms and Conditions

None of us enjoys reading Terms and Conditions, and the fine print. However, you should be aware of the select Nexo Terms and Conditions listed below to fully understand your risks.

VIII. RISK DISCLOSURE

3. The regulatory status of Digital Assets is currently unsettled, varies among jurisdictions and is subject to significant uncertainty. Legislative and regulatory changes or actions relating to the Digital Assets or blockchain technology at a state or international level may adversely affect or restrict, as applicable, the use, transfer, exchange and value of the Digital Assets, as well as the provision of the Nexo Earn Interest Product, the related Nexo Wallet Services or any of them.

4. The nature of Digital Assets may lead to an increased risk of fraud or cyberattacks and any losses due to fraudulent or accidental transactions will likely not be recoverable.

8. We may be forced to suspend, discontinue, or change aspects of the Nexo Earn Interest Product or any of the related Nexo Wallet Services in any jurisdiction, without notice, if demanded by the regulators or Applicable Law, or for whatever other reason. In such case the Digital Assets in your Nexo Account may be frozen for an indefinite period of time until the matter is resolved.

9. You understand and agree that you use the Nexo Account and the Nexo Earn Interest Product at your own risk. This section is not exhaustive and does not disclose all the risks associated with the Digital Assets and the use of the Nexo Earn Interest Product and any of the related Nexo Wallet Services. You shall, therefore, carefully consider whether such use is suitable for you in light of your circumstances and financial resources.

Block Fi

Key Statistics

  • $15B+ assets under management
  • 500,000+ users
  • 13 coins supported
  • 66 crypto-to-crypto trading pairs supported

Security

  • Majority of assets kept in cold storage
  • All “hot wallet” storage servers have a security rating of FIPS 140-2 Level 3 or higher
  • SOC 2 Type 1 security compliant
  • Digital asset insurance provided by Gemini protecting against the loss of cryptocurrency related to security breaches, fraudulent transfers, or employee theft
  • Two-factor authentication
  • Asset balance sheets only get lent to trusted institutions and corporations
  • “Allowlisting” allows you to ban all cryptocurrency withdrawals, or restrict withdrawals to a list of known addresses

Read more about BlockFi’s security here

Risks

BlockFi is Laying off 20% of its employees

BlockFi announced via a blog post on Monday that it’s laying off 20 percent of its 850 employees – around 170 to 200 people. The company grew from 150 employees at the end of 2020 to more than 850 prior to the cuts.

CEO Zac Prince said in a tweet on Monday that,” BlockFi has been hurt by the “dramatic shift in macroeconomic conditions,” which have had a “negative impact” on growth. Prince said BlockFi’s main goal is “to achieve profitability” and that the company is “here for the long haul.”

In addition to the job cuts, the platform is also reducing marketing spending, eliminating non-critical vendors, reducing executive compensation, and slowing headcount growth, according to a blog post from co-founders Prince and Flori Marquez.

Interestingly, there is still a fair number of job openings at their official site mostly for tech roles.

Extreme market conditions and more downside. Can BlockFi weather the storm?

BlockFi was founded in August 2017, and it survived during the last crypto winter. Although BlockFi’s past performance as a new entrant in the industry doesn’t necessarily guarantee the same outcome as they became a more mature player.

It is worth noting that BlockFi’s current valuation at $1 billion is substantially lower than it was during their last round of funding in March of 2021, when BlockFi raised $350 million at a larger valuation of $3 billion. BlocFi was reportedly set to raise a further $500 million, valuing it at nearly $5 billion, in late July 2021. However that funding round has never been closed as SEC began questioning the legality of the BlockFi Interest Account (BIA) offering. In February of 2022, the firm agreed to pay a total of $100 million in penalties to the U.S. Securities and Exchange Commission (SEC) and several state regulators as part of a settlement in an investigation into whether its high-yield lending product was a securities offering.

Another interesting piece of information has surfaced today. Twitter user that goes by name otteroooo posted what appears to be a leaked BlockFi P&L (Profit and Loss Statement), showing a negative Operating Net Income in the past two years. Based on the document, BlockFi lost $63.9M in 2020, $221.5M in 2021, and is projected to close 2022 at a $56.5M loss.

I want to caution, however, that validity of this information is unknown.

Potential Exposure in DeFi

While BlockFi didn’t suffer any significant consequences from Terra Luna crash, we don’t know where BlockFi invests their capital, and whether or not they could potentially be exposed to any significant DeFi risk.

Understanding Terms and Conditions

BlockFi updated their Terms and conditions to include the following:

BlockFi and our third party partners may experience cyber-attacks, extreme market conditions, or other operational or technical difficulties which could result in the immediate halt of transfers and withdrawals of cryptocurrency either temporarily or permanently. BlockFi is not and will not be responsible or liable for any loss or damage of any sort incurred by you as a result of such cyber-attacks, operational or technical difficulties or suspensions of transfers or withdrawals.

Reputation & Customer Satisfaction

BlockFi rating on the Trustpilot had declined in the past few months from 4.0 in February to 3.4 in June.

Celsius

Key Statistics

  • $22.1B assets under management
  • 1.6M+ users
  • Available in 150+ jurisdictions
  • 40+ crypto assets supported

Update: Celsius was valued at about $3 billion after raising $690 million in a Series B financing round in May 2022, according to the bankruptcy filing. Celsius said in court that the value of its assets have fallen by about $17.8 billion since March 30, 2022, to $4.3 billion from roughly $22.1 billion.

Related:

Celsius Bankruptcy Hearing News | Will Users With Earn, Borrow & Custody Accounts Recover Their Investments? Will Celsius Declare Bankruptcy?

Goldman Sachs Hopes To Acquire Assets At A 38% Discount After Nexo’s Offer Was Rejected

YouTuber BitBoy Threatens Class Action Lawsuit Against Celsius & Alex Mashinsky

Security

  • Security ISO certified
  • 2FA Authentication
  • Whitelisted withdrawal addresses
  • “HODL mode” which can be activated to restrict withdrawals
  • Fireblocks and PrimeTrust (their custodians) both provide insurance on digital assets held by Celsius
  • Borrowers are required to post collateral of up to 150%
  • $30 million in insurance for assets stored in the Celsius wallet app

Read more about Celsius’s security here

Celsius hasn’t announced any layoffs

While Celsius hasn’t announced any layoffs, it could be a matter of time depending on how successfully the company will be able to resolve their liquidity crisis. Celsius shows some moderate job openings, mostly in HR sector. This is different than Nexo and BlockFi that primarily recruit for Tech positions.

Update: Jul 4, 2022 Celsius laid off some 150 employees as it battles a financial crisis that saw it halt customer withdrawals last month, Calcalist reported over the weekend. The firm has about 650 staff members listed on LinkedIn, including executives, meaning 23% of the company was affected.

Risks

Financial Health (Liquidity)

The recent liquidity crisis at Celsius created havoc in the crypto industry. On June 12th Celsius made a decision to halt withdrawals, swap, and transfers. Celsius has evaluated its assets and has come to the realization that, if every customer were to withdraw their balances, they would not have enough liquidity to reimburse them.

Subsequently, this announcement has triggered a small-scale bank run across the market and amongst other competitors of Celsius, including Nexo and BlockFi.

Investment in risky DeFi projects

Celsius staked its money in the DeFi Anchor Protocol. The Block Crypto explains how Celsius did that:

“The process of depositing funds to Anchor Protocol was convoluted. Igamberdiev explained that it involved first staking ETH using Lido to receive Staked ETH (stETH); then sending stETH to Anchor vault on Ethereum in order to mint and send bETH (a token representation of stETH) to Wormhole, a crypto bridge; minting bETH on Terra using Wormhole; before finally depositing bETH to Anchor Protocol.”

Cory Klippsten, Swan Bitcoin’s CEO, criticized the service and told the WSJ:

“It’s being marketed as a better savings account and it’s not. What you really are doing is, you’re an unsecured lender. They’re gathering retail loans and investing it out the back end in lightly regulated activities.”

Related:

Can Celsius $CEL Follow Terra Luna Death Spiral? Investors Loose Confidence Amid Withdrawal Freeze

DeFi vs. CeFi vs. TradFi | What Caused 2022 Crypto Market Crisis?

Understanding Terms and Conditions

In making the decision to suspend trading, Celsius said:

In service of that commitment and to adhere to our risk management framework, we have activated a clause in our Terms of Use that will allow for this process to take place. Celsius has valuable assets and we are working diligently to meet our obligations.

This statement led some investors to look into their Terms of Use, which all users had to sign. They discovered the following:

In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable, and you may not have any legal remedies or rights in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under any applicable laws.

Reputation & Customer Satisfaction

Celsius’s rating on Trustpilot is the lowest among all three players, which is not surprising, considering the latest events.

General Risks Of CeFi Space Every Savvy Investor Should Know

1. Third Party Risk

The most significant risk with keeping your funds on a custodial service like a centralized (CeFi) savings or lending platform such as Nexo, BlockFi, and Celsius is that you do not own that crypto.

Current situation with Celsius’ withdrawals is a case in point. You can be denied access to your crypto at any time.

The crypto regulatory landscape is constantly changing, and we have seen a few instances where global authorities demanded that crypto platforms lock people out of their crypto accounts. Centralized platforms need to comply with regulatory lawmakers and the authorities, so if you find yourself on the wrong side of an issue, such as taking part in a peaceful protest that the government decides they do not like, or you live in a country that is suddenly sanctioned, you could be frozen out of your account indefinitely.

” Nexo Continues to Comply with International Laws

In light of the recent unfortunate developments in Ukraine, a number of countries have started imposing economic sanctions on Russia, including but not limited to sanctions on major Russian banks. Sanctions have also been imposed on Belarusian banks.

We understand that these actions may cause disruption to our services and we apologize for any inconvenience. Following our constant quest for compliance, we want to reassure you that Nexo is closely monitoring the situation and taking all necessary steps to continue to operate in compliance with international laws.

Anytime there is a centralized entity, there is a centralized authority who can play judge, jury, and executioner over the customers on the platform.

2. Rapidly changing global laws and regulations

Note that at the time of writing, BlockFi is not available to new signups in the US for their interest-earning accounts as they have recently been handed a fine of 100M dollars from the SEC, which has been paid.

BlockFi SEC

Image via sec.gov

Nexo also recently changed the terms for U.S. customers to a product that offers the ability to earn high interest rates on crypto deposits. The decision follows the U.S. Securities and Exchange Commission’s recent settlement with BlockFi Inc. over a similar product. 

Just as BlockFi, Nexo is now planning to register its offerings with the regulator. Nexo’s current U.S. customers won’t be able to earn interest on new deposits, though they’ll be able to continue earning on existing digital-asset balances, the statement said. New clients won’t be able to access the product at all. The firm said non-U.S. clients will remain unaffected by the recent updates. 

Bloomberg reported in January that SEC is scrutinizing Celsius NetworkGemini Trust Co., and Voyager Digital Ltd. over issues similar to the ones raised in the BlockFi settlement.

3. Targeted Hacks

Another significant risk with centralized platforms comes in the form of targeted hacks. For example, centralized exchanges are popular targets for hackers as every crypto hacker on the planet is aware of these exchanges and how lucrative a successful attack can be.

Crypto hacks
Some of the Largest Exchange Hacks Image via statista.com

In CeFi, the customers transfer the custody of their holdings to the exchanges. They also provide their private details to these exchanges. In case the exchange is hacked or suffers from a cyber attack, there’s a real chance of losing funds. Even if the funds are safe, there is a risk of compromised privacy.

Related:

Risks of Anchor Protocol vs. Nexo, Celsius, BlockFi | Are Crypto Savings Accounts Safe?

Disclaimer:

The information provided on this page does not constitute investment advice, financial advice, trading advice, or any other sort of advice and it should not be treated as such. This content is the opinion and this site does not recommend that any specific cryptocurrency should be bought, sold, or held, or that any crypto investment should be made. The Crypto market is high-risk, with high-risk and unproven projects. Readers should do their own research and consult a professional financial advisor before making any investment decisions. Alicebuzz.com does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is Alicebuzz.com an investment advisor. DYOR. Please note that Alicebuzz.com participates in affiliate marketing.

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