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Nexo co-founder affirms 'business as usual' for the crypto lender amid FTX fallout

Nexo Co-Founder and Managing Partner Antoni Trenchev joins Yahoo Finance Live to weigh in on the fallout for the crypto market amid the collapse of FTX and why he doesn't think it will have much of an impact on his company's performance.

Video Transcript


- Well, the fallout from the collapse of FTX continues. High-profile interviews by embattled founder and former CEO Sam Bankman-Fried and further debate on whether he knowingly co-mingled funds. He has said that he didn't. Well, we asked FTX investor and former sports spokesperson Kevin O'Leary what he thinks this morning. Take a listen.

KEVIN O'LEARY: By the time this is over and you ask me what Sam Bankman-Fried did, we'll know. It'll be totally, totally transparent, and until then, I'm not joining the herd. I'm just waiting for the facts.

- Well, since BlockFi filed for chapter 11 bankruptcy protection last week, the question many are asking is how widespread could the contagion be? Our next guest is Antoni Trenchev. He's the managing partner and co-founder of major crypto lender Nexo. We've also got Yahoo Finance's David Hollerith joining in on the conversation. It is great to have you on at a time when so many people have questions about this space. Now you have, since the fallout of FTX, put out this statement, Nexo has at least, to say very clearly that you don't have the exposure to FTX, you don't have the exposure to some of these other lenders that have fallen. And yet there are still questions about what exactly your balance sheet looks like.

Yes, you've put out the proof of reserves, but they haven't really clarified what you account to be as assets. So number one, can you clarify that? And how much of those assets actually include your own token, Nexo?

ANTONI TRENCHEV: Well, we have been very transparent about that. Out of the total balance sheet, less than 10% are made up by our own native token, that's the Nexo token. You said proof of reserves. We've shown more than actually the proof of reserves, which right now is quite trendy. A lot of companies throwing out their addresses with lots of assets on it. Where we differ is that we have shed light into our liabilities, the other side of the equation. And we have gone the extra mile of showing that our assets exceed liabilities, which very few companies in the space have done. And I think that is one of the reasons that we are navigating through these challenging times better than most.

And the underlying business model is the other reason. So for us, this is business as usual. What looked from the outside as very comparable businesses had very different underpinnings. And we have been standing the test of time,

DAVID HOLLERITH: Yeah, Antoni, you know Nexo for a long time has been very active, or I guess you would say is ahead of the game about doing proof of reserves. And I was curious, why stop short of actually disclosing a full balance sheet, of showing the assets that are claimed? I bring that up because, obviously, a lot of what happened with FTX started with Alameda Research having a leaked balance sheet that showed that a lot of the assets they were claiming were tokens. And you obviously pointed out that it's not your token that makes up the majority, but I'm just curious why not more transparency?

ANTONI TRENCHEV: Sure. We are striving for more transparency always. I think the major problem with FTX and Alameda was the fact that they have been very heavily borrowing against their own token. If you look at the leaked balance sheet by Alameda, you will see that they have on their balance sheet more FTT than there is in circulating supply. So that is the problem is the fact that they have been borrowing against their own token, which we have not.

In terms of transparency, we are different than an exchange and we spend some time in trying to explain that. We have an exchange functionality but we have our smart ordering routing system that sends out customer orders through various different exchanges, which is very different than a traditional exchange, which has its own order books. And ideally all the assets stay within those assets and they just are addresses and they are just matching the orders of the various clients.

Our system, because we came in later into the game, we saw advantage elsewhere creating this smart order routing system that gives you best-price execution. And the byproduct of this is for this to function well, you have to keep balances across different exchanges. And we also keep a lot of assets that are off chain, so it is not so easy to do this Merkle tree type of audit on a company such as Nexo.

That's why we did what I believe to be the next best thing is to partner up with a third-party auditor who can see the full picture, vouch with their authority and reputation that our assets exceed liabilities. And we did that last year when times were good, Bitcoin was flying from one record high to the next. We were preparing and future-proofing and safeguarding the enterprise against the very concepts and contagion like viruses that are spreading across the industry. So I think that we are one of the better examples for transparency in the blockchain space.

- And Antoni, I want to ask you about these yields. Some of these are quite enviable, 10% on some of these stablecoins. How are you able to provide such yields, and what does it mean then when you have a crypto winter and you're seeing the value of some of these tokens declining so quickly?

ANTONI TRENCHEV: Well, we have to be completely honest here. The highest yields that are achievable and some people earn those interest rates are not necessarily representative of the entire book and asset mix. Because to earn 10% you have to have a certain amount of Nexo tokens. There are certain limits up to the amounts that can earn those interest. We have this internal joke that when you see a billboard of the new Mercedes S-class and it says starting only $70,000 and they show you the S-64 AMG which has every possible feature and extras on it, obviously this particular model costs slightly more.

So as an aggregate, the book, the average client earns much smaller percentage yields. And the reason for that is that we, as a company, we've never relied on outside financing. Short from our token sale in 2018, we have no outside financing. So no fancy VCs which have given us money to burn on customer acquisition. We bootstrapped the whole thing. We had a profitable and have a profitable business model to this day. So we try to make this economically sound in a way that we can continuously generate and yield and deliver good solutions for our clients.

- Antoni, let me try to press on that point. And I want to pull up a tweet here from a Bitcoin analyst who I think kind of bottom lined the question for us. He says, ask yourself how Nexo is paying 10% on stablecoins while DeFi yields are 1%, short duration US treasuries are 4 and 1/2%. And then he goes on to say if the yield is greater than the risk-free market rate, they are by definition taking directional risk to chase said yield. How do you respond to that?

ANTONI TRENCHEV: Well, just to reiterate the point. As an aggregate all combined, our clients are not earning 10%. They're earning a much smaller percentage. And we are seeing opportunities in the markets to generate that yield for our clients in a market-neutral safe way. We have disclosures in place which stipulate what we are doing with those assets. So what you get is what you signed up for. And the fact that after these colossal fails after redemptions, which have been sizable in the past nine months, our systems are processing both deposits and withdrawals in real time without having to resort to any sort of bailouts, without having to resort to lock ins, without having to resort to any sort of restriction on customer activity, I think it speaks volumes in and of itself about the sustainability of our business model, the stringent risk management policies we have in place, and quite frankly, that we know what we are doing.

DAVID HOLLERITH: Yeah. And just 30 seconds here. But I know that Nexo came out as very strong and wanting to acquire companies this summer. Up to this point it sounds like outside of an acquisition and a small stake in a US bank there hasn't really been any acquisitions that the transaction has been completed. And I was just curious, why hasn't Nexo acquired more companies as it has sort of set out to do since the summer?

ANTONI TRENCHEV: Well, this is actually what differentiates you being a prudent business that takes time to audit companies to see their financial states and to make the decision to acquire and not acquire them. The type of panicky acquisition of companies which happen to have outstanding credit lines to you, this is what is unsustainable when the last one who was doing that was doing it for the sole purpose of the loans that he had received not being called back. So for him, and you know obviously I'm talking about Sam Bankman-Fried, FTX and Alameda, it was a lack of choice. They had to acquire those companies in a frenzy, whereas for us this is by no means at all cost.

We can do the due diligence, wait and see what assets can be retrieved from the companies such as Vault where we are potentially looking to acquire it, and then make rational decisions that make business sense and deliver value both for the existing customers that are locked out outside their firms and both for Nexo clients and us as investors.