regulation

NEXO risks 50% drop due to regulatory pressure and investor concerns

Analysts fear NEXO price could come under pressure if regulatory action in the United States begins to intensify.

Crypto lending firm Nexo is at risk of losing half of the valuation of its native token by the end of 2022 as doubts about its potential insolvency grow in the market.

Is Nexo too centralized?

For the unversed: Eight U.S. states filed a cease-and-desist order against Nexo on Sep. 26, alleging that the firm offers unregistered securities to investors without alerting them about the risks of the financial products.

In particular, regulators in Kentucky accused Nexo of being insolvent, noting that without its namesake native token, NEXO, the firm’s “liabilities would exceed its assets.” As of July 31, Nexo had 959,089,286 NEXO in its reserves — 95.9% of all tokens in existence.

“This is a big, big, big problem because a very basic market analysis demonstrates that Nexo would be unable to monetize a significant chunk of these tokens,” noted Mike Burgersburg, an independent market analyst and author of the Dirty Bubble Media Substack, adding:

“Given that fact, the true value of the $NEXO tokens on Nexo’s balance sheet is likely close to $0.”

Comparisons with Celsius

Burgersburg also alleged that Nexo faces insolvency risks because it holds the vast majority of NEXO’s token supply on its platform. He drew comparisons to Celsius Network, a now-defunct crypto lending firm that owned more than 50% of its native token, CEL.

The top 100 NEXO holders collectively own 95.53% token supply. Source: Etherscan

Celsius ended up holding over 90% of the total CEL tokens in circulation after attracting deposits and collateral from customers. This made CEL extremely illiquid and, thus, volatile. In other words, CEL became a deeply imperfect asset for patching Celsius’ troubling balance sheets.

“NEXO token is even more illiquid than the bankrupt Celsius Network’s CEL token,” warned Burgersburg, noting that the token’s average daily trading volume comes to less than 1% of its market capitalization.

However, a Nexo spokesperson denied the allegations, clarifying that the data they provided to Kentucky regulators was for one of the Nexo Group’s entities. 

“We can confirm that on a consolidated basis, NEXO tokens represent less than 10% of the company’s total assets,” they told Cointelegraph, adding:

“That, in return, exceeds the company liabilities even when excluding the company’s net position in NEXO tokens.”

As to why Nexo holds more than 90% of the NEXO supply, the firm’s spokesperson cited the token’s economics and utility, saying that they create natural incentives for clients to keep their tokens on the platform.

“In addition to earning higher interest rates on their digital asset balances by holding NEXO tokens on the Nexo platform, clients can use NEXO tokens as collateral, earn interest on them and exchange them directly on the Nexo platform,” they explained, adding:

“The same is true for the tokenomics of companies with similar value propositions such as FTT, BNB and CRO, held predominantly on FTX, Binance and Crypto.com, respectively.”

NEXO price could get rocky

The fear, uncertainty and doubt surrounding the rumors of market volatility or stringent regulation against crypto lending platforms could create negative investment sentiments toward NEXO. Unfortunately, the token’s technical setup suggests the same.

Related: Nexo acquires stake in US chartered bank

Notably, NEXO’s price has been forming what appears to be an ascending triangle on its longer-timeframe charts since June 12. Ascending triangles are considered bearish continuation patterns in a downtrend, which makes NEXO susceptible to extreme price declines.

By the rule of technical analysis, an ascending triangle resolves after the price breaks below its lower trendline and continues falling in the same direction until it reaches the level that is at length equal to the triangle’s maximum height.

This setup is illustrated in the chart below.

NEXO/USD 3-day price chart featuring ascending triangle breakdown setup. Source: TradingView

In the event that the pattern confirms, the price of NEXO could fall toward $0.47, down about 50% from its current price.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

Market manipulation claims will be hardest ‘nut to crack’ in Bitcoin ETF approval — WisdomTree

“We’re all kind of watching this and seeing what’s going to happen,” said WisdomTree’s Will Peck on spot Bitcoin exchange-traded funds in the United States.

Will Peck, the head of digital assets at exchange-traded fund provider WisdomTree said regulators in the United States will “ultimately get there” on approving a Bitcoin spot investment vehicle, but dealing with claims of market manipulation could be a challenge.

Speaking to Cointelegraph at the Converge22 conference in San Francisco on Sept. 29, Peck said WisdomTree would not follow Grayscale by taking legal action against the U.S. Securities and Exchange Commission for denying its Bitcoin (BTC) ETF application. According to Peck, the company planned to “engage more productively” with the SEC without a lawsuit, but tackling some of the regulator’s reasons for turning down spot Bitcoin ETF applications could take time.

“We’re all kind of watching this and seeing what’s going to happen,” said Peck. “The reasons that [the SEC has] given have really been around potential for market manipulation — that Bitcoin trading does not happen on regulated venues […] There’s been some questions in the past of custody, the ability of qualified custodians, whether banks or otherwise to be able to custody crypto assets on behalf of a registered firm like this.”

He added:

“I think it seems that the first one around market manipulation’s kind of the hardest nut to crack, where there’s been the biggest slowdown.”

Peck said that the firm would continue to engage with U.S. regulators over an ETF offering. WisdomTree has several exchange-traded products linked to different cryptocurrencies in Europe, and has filed more than one application with the SEC for a spot Bitcoin ETF offering in the United States. The SEC rejected one of the company’s applications in December 2021, after which WisdomTree amended its filing to name U.S. Bank as a crypto custodian for its Bitcoin trust.

Related: Self-custody isn’t for everyone: WisdomTree exec on ‘be your own bank’

While Grayscale’s legal actions against the SEC over its ETF offering are ongoing, the firm’s chief legal officer Craig Salm suggested it could take from one to two years for a resolution. The U.S. regulator began approving investment vehicles linked to BTC derivatives for the first time in October 2021, but has turned down spot Bitcoin ETF applications from 16 companies, often saying the investment vehicles were not “designed to prevent fraudulent and manipulative acts and practice.”

Market manipulation claims will be hardest ‘nut to crack’ in Bitcoin ETF approval — WisdomTree

“We’re all kind of watching this and seeing what’s going to happen,” said WisdomTree’s Will Peck on spot Bitcoin exchange-traded funds in the United States.

Will Peck, the head of digital assets at exchange-traded fund (ETF) provider WisdomTree, said regulators in the United States will “ultimately get there” on approving a Bitcoin spot investment vehicle, but dealing with claims of market manipulation could be a challenge.

Speaking to Cointelegraph at the Converge22 conference in San Francisco on Sept. 29, Peck said WisdomTree would not follow Grayscale by taking legal action against the U.S. Securities and Exchange Commission for denying its Bitcoin (BTC) ETF application. According to Peck, the company planned to “engage more productively” with the SEC without a lawsuit, but tackling some of the regulator’s reasons for turning down spot Bitcoin ETF applications could take time.

“We’re all kind of watching this and seeing what’s going to happen,” said Peck. “The reasons that [the SEC has] given have really been around potential for market manipulation — that Bitcoin trading does not happen on regulated venues […] There’s been some questions in the past of custody, the ability of qualified custodians, whether banks or otherwise to be able to custody crypto assets on behalf of a registered firm like this.”

He added:

“I think it seems that the first one around market manipulation’s kind of the hardest nut to crack, where there’s been the biggest slowdown.”

Peck said that the firm would continue to engage with U.S. regulators over an ETF offering. WisdomTree has several exchange-traded products linked to different cryptocurrencies in Europe and has filed more than one application with the SEC for a spot Bitcoin ETF offering in the United States. The SEC rejected one of the company’s applications in December 2021, after which WisdomTree amended its filing to name U.S. Bank as a crypto custodian for its Bitcoin trust.

Related: Self-custody isn’t for everyone: WisdomTree exec on ‘be your own bank’

While Grayscale’s legal actions against the SEC over its ETF offering are ongoing, the firm’s chief legal officer Craig Salm suggested it could take from one to two years for a resolution. The U.S. regulator began approving investment vehicles linked to BTC derivatives for the first time in October 2021 but has turned down spot Bitcoin ETF applications from 16 companies, often saying the investment vehicles were not “designed to prevent fraudulent and manipulative acts and practice.”

US lawmaker hints at calling for Republican votes in 2022 midterms over crypto policies

Representative Patrick McHenry said regulatory clarity for digital assets would be one of his “top priorities” if he became the next chair of the House Financial Services Committee.

North Carolina Representative Patrick McHenry may have used his virtual appearance at a cryptocurrency conference as a soapbox to call for votes in the 2022 United States midterm elections.

In a prerecorded message for the attendees of the Converge22 conference in San Francisco on Sept. 29, McHenry suggested that the goal of a “clear regulatory framework” for digital assets could drive U.S. lawmakers to develop legislation. The Republican lawmaker used terms including “bipartisan consensus” and support from both major political parties over certain regulatory frameworks related to digital assets and stablecoins before seemingly encouraging crypto users to vote red in the next election.

“To ensure that these technologies flourish here in the United States, we need to provide regulatory clarity to the digital asset ecosystem,” said McHenry. “This will be one of my top priorities if I become chair of the House Financial Services Committee next Congress.”

Representative Patrick McHenry addressing Converge22 attendees via recorded message

The current chair of the House Financial Services Committee, Representative Maxine Waters, was approved by the Democratic Caucus in 2018 to serve in the committee’s leadership after the party hadwon back control of the House of Representatives. Under House rules, the majority party recommends a chair, while the minority party recommends a ranking member. 

McHenry seemed to suggest that by voting to have Republicans take control of the House, he would prioritize policies for crypto users. At the time of publication, 221 representatives in the House caucus with the Democrats, while Republicans hold 212 seats. The slim majority in both the House and Senate has many experts suggesting that Republicans have a chance to flip both chambers in the November 2022 Midterms i.

Related: Coinbase to educate users on policies held by local politicians with new app integration

Under the U.S. Federal Election Commission rules, candidates, campaigns and political action committees generally need to add a disclaimer to any advertisement promoting the election of one candidate or the defeat of another unless it is considered “of minimal value.” Though McHenry’s speech largely focused on the draft bill and suggested stablecoins were a “bipartisan entry point for Congress to bring clear rules to the digital asset ecosystem,” mixing crypto and politics is nothing new for the space.

Coinbase CEO Brian Armstrong made waves in September 2020 following a blog post in which he described the crypto exchange as “laser focused on achieving its mission” as part of a company that largely abstained from engaging in U.S. politics. The crypto exchange launched a voter registration portal in August as part of a crypto policy education initiative.

SEC alleges fintech and ‘market maker’ firms manipulated crypto market in token scheme

Though the SEC has pursued many enforcement actions related to initial coin offerings, the regulator’s stance on airdrops’ role in alleged token schemes is unclear.

The United States Securities and Exchange Commission, or SEC, has announced charges against Hydrogen Technology Corporation and its market marker Moonwalkers Trading Limited related to allegedly perpetrating a scheme to manipulate the trading volume and price of Hydro tokens.

In a Sept. 28 announcement, the SEC said former Hydrogen CEO Michael Ross Kane hired Moonwalkers and its CEO Tyler Ostern “to create the false appearance of robust market activity” following the distribution of Hydro tokens through an airdrop, bounty programs and direct sales in 2018. Kane then had Moonwalkers sell the tokens in the “artificially inflated market” for more than $2 million in profit on behalf of Hydrogen.

“As we allege, the defendants profited from their manipulation by creating a misleading picture of Hydro’s market activity,” said Joseph Sansone, chief of the SEC Enforcement Division’s market abuse unit. “The SEC is committed to ensuring fair markets for all types of securities and will continue to expose and hold market manipulators accountable.”

According to the SEC, Kane’s, Ostern’s and the companies’ actions constituted manipulation of the crypto market, violating provisions of U.S. securities laws. The regulator reported Ostern had consented to pay more than $40,000 in disgorgement and interest, subject to approval by a New York federal court “with civil monetary penalties to be determined at a later date.” The SEC’s complaint sought similar actions against Kane, as well as having the former CEO barred from holding officer and director positions.

Many in the crypto space criticized the SEC complaint as an example of regulation by enforcement — in this case, claiming the regulator was extending airdrops to its purview.

“They say airdrops meet the Howey test’s “investment of money” prong, even if no one makes an investment and no money changes hands,” said Jake Chervinsky, head of policy at the crypto advocacy group Blockchain Association. “The SEC talks a lot about airdrops, but then only seems to argue that distributions via direct sales, bounty programs and employee compensation are securities transactions.”

Others suggested that while the SEC’s actions may have been seemingly par for the course on crypto enforcement, they may not have necessarily been targeting token airdrops:

Related: Binance denies allegations of market manipulation

Though the SEC has pursued many enforcement actions against initial coin offerings among crypto firms, the regulator’s stance on airdrops’ role in alleged token schemes is unclear. Commissioner Hester Peirce said in a February 2020 speech that the SEC has hinted a token airdrop “might constitute an offering of securities.”

“Since the SEC has found that some tokens can be securities, if you are considering using an airdrop token distribution, be warned that even giving away tokens is not necessarily free from scrutiny under securities law,” said crypto lobbying group Coin Center’s research director Peter Van Valkenburgh in a 2017 blog.

US lawmakers propose amending cybersecurity bill to include crypto firms reporting potential threats

Under the proposed amendment, the 2015 legislation would be renamed the Cryptocurrency Cybersecurity Information Sharing Act.

United States Senators Marsha Blackburn and Cynthia Lummis have introduced proposed changes to a 2015 bill that would allow “voluntary information sharing of cyber threat indicators among cryptocurrency companies.”

According to a draft bill on amending the Cybersecurity Information Sharing Act of 2015, Blackburn and Lummis suggested U.S. lawmakers allow companies involved with distributed ledger technology or digital assets to report network damage, data breaches, ransomware attacks and related cybersecurity threats to government officials for possible assistance. Should the bill be signed into law, agencies including the Financial Crimes Enforcement Network and the Cybersecurity and Infrastructure Security Agency would issue policies and procedures for crypto firms facing potential cybersecurity risks.

The original bill, which passed in the Senate in October 2015, essentially set up a framework for the U.S. government to coordinate cybersecurity reports from “private entities, nonfederal government agencies, state, tribal, and local governments, the public, and entities under threats” and recommend possible methods to prevent and protect against attacks. Under the proposed amendment, the legislation would be renamed the Cryptocurrency Cybersecurity Information Sharing Act.

Blackburn reportedly told TechCrunch that the amendments to the cybersecurity bill would provide a means for crypto firms to “report bad actors and protect cryptocurrency from dangerous practices,” given potential illegal uses. Lummis has also co-sponsored bills in the Senate aimed at providing regulatory clarity to the space by addressing the respective roles of the Securities and Exchange Commission and Commodity Futures Trading Commission over digital assets.

Related: Blockchain and cybersecurity awareness on the rise — PolySwarm CEO

The original cybersecurity bill stated it would be in effect for 10 years starting on the date of its enactment. As of October 2015, Congress reported the bill was held at the desk of the House of Representatives.

Israel, Norway and Sweden central banks partner with BIS to explore CBDC payments

The Project Icebreaker initiative aimed to improve cross-border payments by reducing costs and increasing speed and transparency, with a final report expected in Q1 2023.

The Bank for International Settlements, or BIS, has reported it will be partnering with the central banks of Israel, Norway and Sweden to explore international retail and remittance payments use cases for central bank digital currencies, or CBDCs.

In a Sept. 28 announcement, the BIS said the collaboration — named Project Icebreaker — will involve the bank’s Innovation Hub Nordic Centre testing key functions and the technological feasibility of interlinking domestic CBDC systems. The central banks will develop a new hub in which the Central Bank of Norway, the Bank of Israel, and Sveriges Riksbank can connect their proof-of-concept CBDC systems.

Beju Shah, the head of the Innovation Hub Nordic Centre, said the experiment will explore CBDC designs and architecture, as well as related policy concerns. The project aimed to improve cross-border payments using CBDCs by reducing costs and increasing speed and transparency, with a final report expected in the first quarter of 2023.

“Efficient and accessible cross-border payments are of extreme importance for a small and open economy like Israel and this was identified as one of the main motivations for a potential issuance of a digital shekel,” said Bank of Israel deputy governor Andrew Abir. “The results of the project will be very important in guiding our future work on the digital shekel.”

The BIS reported on Sept. 27 that a CBDC pilot involving the central banks of Hong Kong, Thailand, China and the United Arab Emirates was “successful” after a month-long test facilitating $22 million worth of cross-border transactions. Other countries’ central banks have launched similar initiatives related to improving cross-border settlements, as institutions in Australia, Singapore, Malaysia and South Africa announced in September 2021.

Related: Australian pilot CBDC test for eAUD to commence mid-2023: RBA White Paper

The Central Bank of Norway, the Bank of Israel and Sveriges Riksbank have all been considering the benefits of rolling out their respective CBDCs, while China reportedly expanded the trials of its digital yuan to larger swaths of the country in September. In the United States, lawmakers and regulators have taken different approaches to explore the digital dollar, while a March executive order from President Joe Biden had government departments and agencies research the benefits and risks of a CBDC.

DeFi needs appropriate regulation before expanding to retail: Chair Powell

Jerome Powell acknowledged that DeFi will start to reach more retail customers, highlighting the need for regulation.

United States Federal Reserve chairman Jerome Powell has spoken out about the expansion of decentralized finance (DeFi) and its impact on the traditional finance ecosystem, calling for appropriate regulation.

During an event titled the “Opportunities and challenges of the tokenisation of finance” hosted by the Banque de France on Tuesday, Jerome Powell said there were “very significant structural issues around the lack of transparency” in the DeFi ecosystem.

The comments followed those by Bank for International Settlements (BIS) general manager Agustín Carstens who expressed concern over the contrast between DeFi and traditional finance.

Carstens added that the “huge challenge” that they, central bankers and regulators, face is that the DeFi and crypto world is global and borderless.

Powell acknowledged that the interaction between DeFi and the banking system has not been significant from a financial stability viewpoint, limiting the impacts of the “DeFi winter.” However, it demonstrated the weaknesses and work that needs to be done around regulation, he added:

“We need to be very careful about how crypto activities are taken within the regulatory perimeter, where ever they take place […] there is a real need for more appropriate regulation.”

Powell added that as DeFi expands and starts to touch more retail customers, appropriate regulation needs to be in place. The comments suggest that Powell is confident that DeFi will see a great deal of growth in the future despite the current market doldrums.

DeFi total-value locked (TVL) has fallen 71% from its late-December all-time high to around $62 billion, according to DefiLlama. The decline is in line with that of cryptocurrency markets which have retreated by a similar percentage.

Related: DeFi Regulations: Where US regulators should draw the line

Major digital asset firms have largely welcomed the Biden administration’s efforts to push for a clearly defined regulatory framework for crypto. However, the wheels of bureaucracy turn slowly in the United States and there is likely to be a lot of deliberation before anything solid is on the table.

The Fed chair also spoke about a U.S. central bank digital currency (CBDC), stating that should one be launched, it would not be anonymous and would include identity verification for users.

‘Time is not on our side’ to provide regulatory clarity on crypto, says US lawmaker

“We’ve got to move, pick a regulator, and give the market the certainty and guardrails it deserves,” said House Representative Josh Gottheimer.

New Jersey Representative Josh Gottheimer said that United States lawmakers needed to pass legislation clarifying regulators’ role over crypto or risk companies taking their business abroad.

Following a roundtable discussion on Sept. 27 with Commodity Futures Trading Commission chair Rostin Behnam and many industry leaders, Gottheimer said some of the crypto bills proposed by members of the U.S. House of Representatives and Senate were “building blocks” aimed at achieving regulatory clarity. Though saying he was “bullish” on the a crypto bill proposed by the House Financial Services Committee, he added the proposed legislation was not the only possible path forward.

“I’m very open to any solution as long as it provides some of the regulatory certainty that we need to offer the space so that we stop losing businesses and startups and entrepreneurs who are interested in planting a flag here and growing here,” said Gottheimer. “Whether that’s the Stabenow bill or other bills — Lummis and others, [and the bill] they’re working on in the House Financial Services Committee — is less important than actually providing clear guidance and guardrails.”

He added:

“Time is not on our side. We’ve got to move, pick a regulator, and give the market the certainty and guardrails it deserves […] the risk of doing nothing, to me, is a great risk.”

Representative Josh Gottheimer and CFTC chair Rostin Behnam at the Ramapo College of New Jersey on Sept. 27. Source: Facebook.

Gottheimer, a member of the House Financial Services Committee, introduced the Stablecoin Innovation and Protection Act in February — legislation aimed at having the U.S. Federal Deposit Insurance Corporation back stablecoins in a manner similar to fiat deposits and requiring issuers to prove the coins had sufficient cash reserves. However, the larger question of whether cryptocurrencies and stablecoins largely fall under the regulatory purview of the CFTC or Securities and Exchange Commission seems to loom over many lawmakers. 

Related: Industry reps suggest improvements to Stabenow–Boozman crypto regulation bill

Senate Agriculture Committee chair Debbie Stabenow and ranking member John Boozman introduced the Digital Commodities Consumer Protection Act in August. In June, Senators Cynthia Lummis and Kirsten Gillibrand backed the Responsible Financial Innovation Act, a bill which included clarification for the CFTC’s and SEC’s roles over crypto as well as “stablecoin regulation, banking, tax treatment of digital assets, and interagency coordination.” Many lawmakers and those in the crypto industry have also criticized the SEC for taking a ‘regulation by enforcement’ approach to crypto.

“I think there could be great harmony between all of these regulatory bodies,” said Gottheimer. “Clearly we have work to do in the Congress to provide some of that guidance and direction.”

‘Time is not on our side’ to provide regulatory clarity on crypto — US lawmaker

“We’ve got to move, pick a regulator, and give the market the certainty and guardrails it deserves,” said House Representative Josh Gottheimer.

New Jersey Representative Josh Gottheimer said that United States lawmakers needed to pass legislation clarifying regulators’ role over crypto or risk companies taking their business abroad.

Following a roundtable discussion on Tuesday with Commodity Futures Trading Commission (CFTC) chair Rostin Behnam and many industry leaders, Gottheimer said some of the crypto bills proposed by members of the U.S. House of Representatives and Senate were “building blocks” aimed at achieving regulatory clarity. Though saying he was “bullish” on the crypto bill proposed by the House Financial Services Committee, he added the proposed legislation was not the only possible path forward.

“I’m very open to any solution as long as it provides some of the regulatory certainty that we need to offer the space so that we stop losing businesses and startups and entrepreneurs who are interested in planting a flag here and growing here,” said Gottheimer. “Whether that’s the Stabenow bill or other bills — Lummis and others, [and the bill] they’re working on in the House Financial Services Committee — is less important than actually providing clear guidance and guardrails.”

He added:

“Time is not on our side. We’ve got to move, pick a regulator, and give the market the certainty and guardrails it deserves […] the risk of doing nothing, to me, is a great risk.”

Representative Josh Gottheimer and CFTC chair Rostin Behnam at the Ramapo College of New Jersey on Tuesday. Source: Facebook.

Gottheimer, a member of the House Financial Services Committee, introduced the Stablecoin Innovation and Protection Act in February — legislation aimed at having the U.S. Federal Deposit Insurance Corporation back stablecoins in a manner similar to fiat deposits and requiring issuers to prove the coins had sufficient cash reserves. However, the larger question of whether cryptocurrencies and stablecoins largely fall under the regulatory purview of the CFTC or Securities and Exchange Commission (SEC) seems to loom over many lawmakers. 

Related: Industry reps suggest improvements to Stabenow–Boozman crypto regulation bill

Senate Agriculture Committee chair Debbie Stabenow and ranking member John Boozman introduced the Digital Commodities Consumer Protection Act in August. In June, Senators Cynthia Lummis and Kirsten Gillibrand backed the Responsible Financial Innovation Act, a bill that included clarification for the CFTC’s and SEC’s roles over crypto as well as “stablecoin regulation, banking, tax treatment of digital assets, and interagency coordination.” Many lawmakers and those in the crypto industry have also criticized the SEC for taking a “regulation by enforcement” approach to crypto.

“I think there could be great harmony between all of these regulatory bodies,” said Gottheimer. “Clearly we have work to do in the Congress to provide some of that guidance and direction.”