“Even as a teenager I would say, ‘The only thing worth having in the business world is a bank.’ We envisioned Nexo becoming a bank for the new world of blockchain technology and crypto.” ~ @AntoniNexo, co-founder @NexoFinanceClick To Tweet
“There’s always going to be those who say it should remain pure as it is, but it’s just not the way that we are going to bring the next billion people into the blockchain space.” ~ @AntoniNexo, co-founder @NexoFinanceClick To Tweet
“I think it was Lloyd Blankfein who said something like, ‘Be an excellent predictor of the present.’ If you can grasp what is happening, you have a slight edge about the future.” ~ @AntoniNexo, co-founder @NexoFinanceClick To Tweet
Welcome to this conversation with Antoni Trenchev, co-founder and Managing Partner at Nexo, a provider of instant cryptoasset-backed loans and high-yield savings products. Since the April 2018 ICO of their NEXO token, the company has processed over $1 billion dollars in transactions.
This conversation with Antoni is split into 5 chapters:
- Chapter 1: Nexo’s business model and some of its products
- Chapter 2: The lifecycle of a Nexo loan
- Chapter 3: A history of cryptoasset-backed lending
- Chapter 4: The present state of crypto-backed lending
- Chapter 5: The future of the space
Topics Discussed In This Episode
- Antoni’s background prior to Nexo
- Nexo’s origin as a hand-drawn graphic on a piece of paper
- Bitcoin (BTC) forums & the early days of crypto-backed lending
- The mechanics of serving customers in 200+ jurisdictions
- The challenge of complying with diverse US state laws
- Nexo’s zero-fee model – they only make money from loan interest
- Why Nexo doesn’t pay interest on crypto – yet
- The fortuitous timing of the NEXO token sale
- Common uses cases for cryptoasset-backed loans
- Pledging crypto as collateral to minimize taxes
- How to apply for a Nexo loan
- Consumer benefits of dynamic credit lines
- The Nexo credit card
- The size of the cryptoasset-backed lending space
- Extending loans against tokenized physical gold
- KYC and AML for crypto-backed lending
- Why Antoni sees Nexo as a financial institution and a software company
- The importance of simple, transparent regulation
Links Relevant To This Episode
Clay: Welcome to Flippening, the first and original podcast for full time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.
Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion and do [00:00:30] not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.
Welcome to this conversation with Antoni Trenchev, co-founder and managing partner at Nexo.
Nexo is one of the leading companies offering instant crypto-backed loans against digital collateral like Bitcoin. Launched in April 2018, Nexo has already processed over $1 billion dollars [00:01:00] in transactions. My conversation with Antoni is split into five chapters. In chapter one, we discuss Nexo’s business model and some of its products. In chapter two, we look at the lifecycle of a Nexo loan. In chapter three, we get a quick history of crypto asset-backed lending. In chapter four, Antoni covers the present state of crypto-backed lending. And in chapter five, we consider the future of the space.
Before we get started, I should mention in the spirit of transparency that Nexo sponsors this show. Without them and folks them, this kind of content [00:01:30] would not exist. During this podcast’s short history, we’ve had a few notable sponsors, but this is the first time we’ve interviewed someone from a sponsoring institution.
Given Nexo’s position in the crypto-backed loan space and my personal experiences with them as a user, I do believe that I’d have them on the show even if they weren’t a sponsor, but given that I asked them to come on after their sponsorship, there’s no way to know for sure. At any rate, the content from the interview you’re about to hear is the kind of material we like to produce here. I believe you can learn a lot from this conversation [00:02:00] and that this interview stands on it’s own.
Without further ado, here’s my conversation with Antoni Trenchev from Nexo. Enjoy.
Antoni, can you tell me a little bit about your background prior to Nexo? Then, we’ll get into the Nexo origin story right after that.
Antoni: Sure. [00:02:30] My background prior to Nexo. I’ve done a bunch of things. I’ve studied law which I did find a bit boring, so I got interested in the financial sector. I started trading my own account, mostly US and European equities and futures. Then, fresh out of university, I went back home. I was studying in London and Berlin, then I got home in Bulgaria, started a little hedge fund. it was mostly friends [00:03:00] and families. people who would entrust me with their money to manage. I did that for a few years. It was a lot of fun but also a lot of stress.
At a certain point, I decided, despite positive returns for three or four years that this really wasn’t my thing. Around that time, we had elections in Bulgaria. I went on a campaign crusade, luckily got elected. I was [00:03:30] in parliament for 2½ years, passing various business-friendly pieces of legislation because we were a conservative formation in parliament.
Perhaps more interestingly for the listeners, we had the law which was supposed to allow the Bulgarian population to vote electronically from any device which is internet-enabled. Partially, the technology [00:04:00] underpinning this piece of legislation was blockchain technology-based. I’m talking early 2015, so even then you could see the implications of blockchain technology.
Clay: That brings us to around the time of the founding of Nexo. How did Nexo come together? A lot of startups, at least, have an interesting origin story. What were the conversations you were having and the people you were talking to [00:04:30] as you were conceiving of Nexo and thinking about starting this new venture as a co-founder?
Antoni: The full credit for the idea of Nexo is actually with one of the other co-founders, Kosta. He was very early into Bitcoin. He’s always early on things. Around 2014, he got into Bitcoin with a sizable position, and then late 2014 after the Mt. Gox, prices were still depressed. [00:05:00] He was looking for ways to leverage his Bitcoin position.
What he told me was, he was completely sure that somebody had figured out a solution, how you can borrow against your Bitcoin, so that you can access the liquidity that is inherent in the Bitcoin without actually having to sell it. He started doing some research, turned out that there wasn’t such a company. The closest thing there was to anything [00:05:30] like it were the Bitcointalk Forums. There are huge folders of people doing P2P lending.
He compiled the idea into an email, started bouncing it back and forth with friends of his to give him feedback, but he was busy with other things, so he put it on hold. Once the Bitcoin ICO frenzy started 2016, early 2017, he grabbed into [00:06:00] the drawer of his desk, removed the dust off the idea. Still nobody had done that. I remember it very vividly because he had this graphic which he had drawn by hand. He showed it to me and said “What do you think about that?” It was very well-constructed and the vision to which became Nexo was already in there. He was like, “I challenge you to find the flaws and to [00:06:30] tell me what’s wrong with the business model.” I couldn’t think of anything on top of my head because secured lending is a model which has been around for millennia.
I didn’t want to seem I was super excited directly or that I didn’t see any flaws. I just needed some more time. The next day, I was scheduled for a flight to Shanghai, which was one of the first blockchain conferences that I attended to. [00:07:00] Metallic was there speaking, Nick Szabo was there and the Cosmos guys. This is 2017; nobody had even heard of them. I know a bunch of people. I was carrying the model with me with Nexo and then once I came back, I more formally decided to pursue this and perhaps do an ICO. That’s how I joined and it’s been a hell of a ride for the past two years ever since.
Clay: What was the origin of the name Nexo? [00:07:30] Is there an interesting story there? Or is it a more you needed an available domain name and you found one?
Antoni: It was a little bit of both. When Kosta pitched me the idea, I didn’t even have a name. I remember, even as a teenager I would use to say, “The only thing worth having in this world, in the business world is a bank,” and I think he had similar views on it, so we always envisioned Nexo becoming [00:08:00] a bank, eventually, for the brave new world of blockchain technology and crypto. We were looking for domains which could have “bank” in it and .com and were available, and nexobank.com was available. We purchased that for the time; we have a banking license. It’s just four letters and can be pronounced in any language, so we went for it.
Clay: A lot of these ideas [00:08:30] came from a desire to create a crypto bank. That makes sense. I mean, banks provide loans, they give you interest on stored assets, and then you have credit cards. I definitely see where you’re going there.
Let’s transition to chapter one, which is about Nexo. Can you give us some metrics around employees, maybe daily active users or amount held as collateral, amount loaned out? Whatever you can share. Their revenue sources, [00:09:00] org structure? What can you share about the business, the state of the business, and the size of your footprint?
Antoni: Nexo is a truly global enterprise, exactly the way that Satoshi and the white paper envisioned Bitcoin to be borderless, limitless for everyone. We try to stay true to that spirit. We are servicing more than 200 jurisdictions and this has to do with our desire [00:09:30] to be truly global. We underestimated the amount of people we’re going to need to continuously do that and excel at it. Right now, we are just over 60 people that are working for Nexo and my projection is that by the end of the first quarter of 2020, we will be well above 100.
In terms of metrics of the enterprise, it’s fair to say that Nexo is one of [00:10:00] the leading enterprises in the crypto lending space, if not the leading enterprise. This is by a number of different metrics. As I said, we are the only one that provides services in 200 jurisdictions. You can take out the proceeds of your instant credit lines in more than 40 different countries. We are very, very advanced. In terms of number of registered users, we have more [00:10:30] than 300,000.
When somebody ask me, “Where are your clients predominantly from?” I truly do not have an answer. We have clients of different sizes everywhere in the world. Absolutely everywhere, apart from obviously the blacklisted and sanctioned countries, we don’t do business with those. Apart from that, just about any corner of the world.
Clay: And in terms of the jurisdiction of the business [00:11:00] entity that is Nexo, where are you domiciled?
Antoni: In order to service such a large portion of the globe, we have different entities servicing different parts of the world. We have European entities in Estonia, we have in Switzerland, we have in the UK in order to service the European economic area. We have entities in the US to address the market there, to apply [00:11:30] for the relevant licenses.
It’s quite an endeavor in the States for credit facilitation. You got a different license in every state, so we work 50 licenses simultaneously. It’s quite a challenge. The legal team is growing on a daily basis. Super interesting and something that I personally did not anticipate for the States to be so difficult, but there are ways [00:12:00] around there. There are plenty of exemptions which allow you to operate and maintain a significant presence while you are acquiring the licenses, so that’s super excited.
Another thing that you asked me about the revenue sources, we are very transparent with what we do. That’s very important because of the sustainability of the model. With us it’s very simple. We acquire liquidity at wholesale [00:12:30] prices and we extend those funds to our clients at an interest which is a few percentage points above what we are getting the liquidity at.
Me and Kosta were in the States, in New York meeting with just about anyone who would take a meeting with us from the serious guys. We had a sit down with Citibank. I went to JP Morgan, we talked to a bunch of Goldman guys, some of the hedge funds. [00:13:00] Out of this, we were able to secure six months later cost-efficient long-term liquidity which allowed us to lower the borrowing interest rates for our clients to just 5.9%. That’s where the APR starts.
If you look at your uber Visa credit card or your British Airways American Express, [00:13:30] they’re charging you anything between 25% and 76% per year. for an industry as volatile as ours, the interest rates are very competitive. This brings me to the point the revenue source and stream is predominantly from the lending activity.
With Nexo, the only thing that we make money on right now is the interest rate. This is something that we’re quite proud of because all your services [00:14:00] are around your Nexo wallet. We have full functionality. You can store, you can send, you can receive, you can soon exchange your digital assets for other ones, for fiat, and borrowing. Everything happens in the Nexo wallet and it happens at zero fee. We don’t charge you anything at all. Even the mining fees when going out of the Nexo wallet, we take care of that [00:14:30] as well. It’s only the interest rates that we are making money on right now.
This is important and substantial because some of the other players in the space have origination fees. They have liquidation fees. Some of the Defi projects charge you up to 13% in liquidation fees. With us, it’s very transparent and very, very consumer-oriented.
Clay: I do know some competitors you have in the space [00:15:00] take the crypto assets they have under management and make various investments based on them. You aren’t doing anything that with people’s funds?
Antoni: Not at present. We are obviously looking at how to best approach this and it’s an ongoing process. There are some interesting opportunities. But if you ask me about one thing that worries me about the crypto lending space, is precisely what the guys that you describe are doing because [00:15:30] we keep our ears to the track and trying to follow everything that is happening. The reason why we don’t pay interest on crypto right now is because we haven’t quite figured out how to make money in the safe safe way.
What some of the guys are doing is they’re taking crypto from the general public and then they’re extending that crypto to short sellers, to exchanges, to institutional players, which would be fine. [00:16:00] As a principle, there’s nothing wrong with it if you disclose it to your customers that this is happening. The problem is that more often than not they’re not, they do not take in any collateral for extending that crypto. This is this is a very dangerous game. This is something that we have vehemently refused to participate in. We are there with our names and faces. We would like to be proud of what we have accomplished and don’t want to assume unnecessary risks like [00:16:30] some of the other people are doing right now.
Clay: That makes a lot of sense. To reiterate what I see on your website, it looks like the loans are insured and that the funds are held by your custodian The funds are just sitting there. There’s not a lot of complex things happening with them. If you guys do decide that you’re going to do something with the funds while they’re being held, it would be great to decide if there would be an option to get perhaps a higher rate of interest if we allow our [00:17:00] funds to be used for different things.
Antoni: Exactly that’s the plan, Clay. Absolutely. That’s the plan to differentiate the interest rates which you pay, which you get on your deposits in crypto, depending on whether you’re comfortable or not with the collateral being utilized in any way.
Clay: That would definitely differentiate you from basically any of the centralized solutions in the space. So, really there’s just appreciation in the asset [00:17:30] that has your balance sheet and you’re charging a premium on the interest you owe on fiat that you lend out. Then, there’s the earned product where people can earn interest on stable coins. How do you make money on that? If your interest rates are 5.9% and you’re paying out 8% on stable coins, where’s the spread where you make money on that?
Antoni: Let me start off with a general comment. We are not in the [00:18:00] money losing business. I personally do have a problem with models such as Uber’s which say, “I’m gonna subsidize these drivers for the next five years so I gain market share and last man standing is gonna take all.” This type of concept is foreign to me and to team Nexo, I believe, in its entirety. Having this [00:18:30] concept of “Let’s grab market share and then list an IPO and then we’ll make up all the losses by selling shares to the public,” is truly foreign to me.
The APR as I said starts at 5.9% and it’s currently capped at 12%, 11.9% to be exact. I would say the vast majority of the people and the size of the loan book is towards the upper end. It’s closer [00:19:00] on average to the 12% than it is to the 6%, so it does make economic sense, given that our overall pool is actually much, much lower than 8% in terms of what we have to pay for the liquidity. The spread is substantial and it keeps us happy, keeps the employees happy, keeps the investors happy, keeps the Nexo token holders happy, who get 30% of the profits of the company. We actually had two [00:19:30] dividend distributions, so I think we have nailed down a model which is a net positive for absolutely everyone.
Clay: Thanks for breaking that down. I guess one more question is have there been any funding events or has it all been funded by the founders?
Antoni: We did a token sale in early 2018. We were the last larger token sales to meet the [00:20:00] funding goal. We sold our own token, the Nexo token. We sold $52.5 million worth of them. We got lucky because two weeks after that the market crashed so badly. Had we been late just two or three weeks, we wouldn’t have raised the 10th of it, so we got lucky in that sense. But I think the investors also got lucky as well because a month after [00:20:30] the funding round was closed, we launched the platform.
That was, to me, to the team, and I just about anyone involved in Nexo a tremendous, tremendous accomplishment. There’s research by Ernst and Young that less than 13% of ICOs companies have a life product and probably half of that have a useful product. With us growing the way we do—you [00:21:00] can check out the public feedback that has been given about the product—is something that we’re quite proud of.
Clay: Yeah absolutely. It’s a rare thing to see an ICO actually launched. Your launch date was in 2018.
Antoni: Exactly. We launched the platform the very last day of April 2018 and the first dividend distribution was in December the same year.
Clay: Hey! I wanted to pause for a second to let that this episode of the Flippening podcast is [00:21:30] brought to you by the company that produces it, nomics.com
Nomics is a crypto market cap website and aggregator, going head-to-head with CoinMarketCap and others in the space. We stand as a transparent alternative to many of the sketchy market cap websites out there. We won’t name names but who were we’re referring to. Anyway, if you haven’t been to nomics.com in a while, I encourage you to visit our website. We offer transparent volume statistics for nearly every cryptocurrency and crypto exchange in the space, and I believe we have the only credible crypto exchange index [00:22:00] in the space as of the time of this reading. If you’re sick of scammy ads, bad design, and manipulated data provided by companies whose founders hide from public view, then check is out at nomics.com. Okay, back to the show.
Let’s transition to chapter two, the life cycle of a loan. Let’s walk people through the whole thing end-to-end, from getting ready to take out a loan, to going through the application process, and then finally paying it back and receiving [00:22:30] collateral. Maybe before we get into that, it might be helpful to talk about the use cases. What are the main buckets of reasons that you see people using for or that compels most people to take out a loan?
Antoni: The first use case is obviously cryptocurrency investors, both institutional and retail. We have people borrowing to start a business. Just the other day, somebody [00:23:00] tweeted about how he’s sitting on a bunch of Bitcoin for quite some time now, sitting on a hefty profit, and now rather than sell it and pay tax on it, especially in the States where it can go up to 44%—half of it is gone—he was super excited being able to borrow against his Bitcoin. Dollars was his currency of choice to start a business. That’s one use case.
You have people borrowing [00:23:30] smaller amounts to go on vacation. You have somebody like Brock Pierce with whom we executed the world’s first crypto mortgage, where he deposited his Bitcoin early 2019 to buy a second home in Amsterdam, which is surprisingly and curiously enough a Catholic chapel in mid-Amsterdam. How he got the state or whoever to sell it, I have no idea. [00:24:00] He borrowed to do that and Bitcoin was at $3000 back then. Now it’s over $9000. The deal has essentially financed itself.
We have slowly but surely, more and more institutions borrow from us. Proprietary trading desks, little hedge funds, or not so little hedge funds slowly getting bigger and bigger ones. We have cryptocurrency exchanges. We have blockchain companies. We have podcast masters [00:24:30] utilize Nexo also, so even the whole nine yards. Everyone who has crypto and believes in it is a potential customer or client. As I said earlier, we give them the best of both worlds. You hold on to your crypto, access its liquidity in a very user-friendly and tax-efficient manner. It’s a win-win for everyone.
Clay: Let’s say someone is sold on this. They want to [00:25:00] take out a loan. What do they need before they get started? They’re going to go to your website. Do they need IDs? Do they need their crypto wallet? What should they have with them as they go to sign up?
Antoni: First thing would be an internet-enabled device; that’s ubiquitous by now. Apart from that, you just sign up fairly quickly. Your name, your email, telephone number. That’s the basic verification which gives you some basic [00:25:30] functionality.
You can do small-sized borrowing even with that. Once you want to conduct business in some more substantial size, you have to pass the advanced verification, which sounds more complicated than it is. More likely than not, our automated system is going to approve you in two minutes or less. Sometimes it takes an hour. In extraordinary situations, up to 24 hours.
From thereon, [00:26:00] you have to deposit your crypto into your Nexo wallet which is called a Nexo wallet but is essentially a wallet held at BitGo (our custodian), the largest most reputable company doing that in the world today; we’re quite proud to have partnered up with them on the custodial assets. The assets that are placed with BitGo you get to benefit from the $100 million insurance policy [00:26:30] which they have as part of their arrangement with Lloyd’s of London. This guarantees a certain level of peace of mind.
Once the collateral is confirmed by the network, you can start borrowing instantly in stable coins or in 40+ fiat currencies which hits your bank account the same or next day depending on which part of the world you are. [00:27:00] You get that in 40 different fiat currencies and this is due to our extensive network of banking partners. The curious part is that you actually only pay interest on what you withdraw to your bank account or spend with your Nexo card. Just securing the credit line incurs no cost to you, so flexibility and user-friendliness at its finest.
Once you [00:27:30] eventually pay off the loan, you get your Bitcoin back, for instance, if the collateral was Bitcoin. If it has risen in the meantime, you get to profit off that. Again, in a very tax efficient manner. I don’t necessarily want to give tax advice, obviously. Everyone should do their due diligence, but this is what the billionaires of the world have been doing for the past 30 years. Rather than sell their equity, they keep on borrowing against it.
We have tried to emulate that model in the sense [00:28:00] that our credit lines are dynamic. Meaning that if Bitcoin doubles in price, so does your availability available credit lines. As soon as you swipe the card or use your mobile device, as more and more people are doing to pay at the counter, the Nexo Oracle (which is our proprietary software) checks in real time, “Does this person have this amount available in their credit line?” If so, [00:28:30] it instantly approves the transaction. If you pay for a coffee, you just start paying interest on this $3–$4 or $5 or whatever it is. This is very, very cost efficient from the client’s perspective.
Clay: It dynamically increases the size of the loan in real time. That seems like a really good way to go. If you want to spend against your crypto holdings for your day-to-day purchases and you don’t want to have to take out six figures or [00:29:00] whatever the entire sum of the amount is and be paying interest on that daily, you can decide to only increase the amount you’re paying APR against. Essentially micro transactions. That’s pretty great.
Let’s explore the credit card a little bit more. Can you withdraw from an ATM from the credit card and what are the fees associated with that?
Antoni: First of all, it’s going to be a Mastercard and it’s live in the European Economic Area. [00:29:30] I’m sorry if I’m disappointing you here, but the US is going to have to wait a little longer. Potentially, 500 million people have access to it, so we are doing our fair share of preaching and spreading the good word of crypto. Everywhere that Mastercard is accepted, you can use your card. We are finalizing the deal for it [00:30:00] being Apple Pay-enabled. you can use it on your mobile devices.
It’s going to be a card just like any other. There are different tiers on it, so it has to do with staking of Nexo tokens. Depending on which tier you’re in, you’ll have different amounts of cash backs, free transactions, the amounts you can monthly withdraw on ATMs.
Clay: Okay, so someone takes out a loan. How do interest payments [00:30:30] work? Are they due monthly? How do you go about paying down the loan?
Antoni: We try to keep it flexible. What I’m going to describe is the general case, but it obviously is going to vary from jurisdiction to jurisdiction. With some states, it might be different than others because of the regulation being the way they are. Generally the way it works, again flexibility is the name of the game here. You pay, [00:31:00] let’s say 5.9% per year, which breaks down to very small amounts daily, which are debit from your available balance. You don’t have to do anything.
This is great, especially when crypto is steadily rising in value. The whole thing finances itself and it just opens up more available credit to you. You don’t necessarily have to pay off monthly or [00:31:30] in installments. There there is no installment preset plan. You come to us and you deal on your own terms.
Clay: If crypto or whatever asset you’re holding continues to increase in value, then there’s no need to actually make additional payments because your loan-to-value ratio just unlocks more loan you can take out.
Antoni: You become Mark Zuckerberg. That’s what he [00:32:00] has been doing since Facebook went public. There is a very interesting article on the New York Times and it’s called the Zuckerberg Tax. It’s exactly what the billionaires of this world have been doing is as long as you have an asset that is steady rising in value you don’t have to worry about any of those repaying it or even paying capital gains tax on.
Clay: I don’t know if other providers are doing it that way but I haven’t personally seen that.
Antoni: I don’t think anyone [00:32:30] else is doing it.
Clay: Essentially the reason why people would have to make a payment is in the event of a margin call, which could be triggered if your loan-to-value ratio gets out of whack. Is there a standard across the board loan-to-value ratio? What percentage of the assets held by Nexo can can you take out?
Antoni: Obviously, Bitcoin has the highest loan-to-value ratio, currently at 50%. This is done [00:33:00] for a number of reasons. First of all, to protect you against over-leveraging yourself. Bitcoin’s volatility is in a downward trajectory now that we have all sorts of different instruments, the futures on the Chicago mercantile exchange, hopefully at some point ETF. Bitcoin’s volatility is going to go further down, but still is relatively high. We are encouraging under-leverage, [00:33:30] that’s number one. This protects you, the company (Nexo), and its investors as well.
We survived the worst bear market in history (2018) and we haven’t lost a dollar as an enterprise because of the efficiency of our software system, but also because our customers and clients are savvy people. They know how to [00:34:00] structure their finances. They deposit more collateral, repay their loan. We did not have that many liquidation as you would have expected with Bitcoin dropping something like 80%.
Clay: Let’s say someone gets to the end of their loan period and they decide that they want to pay back the loan. Will you allow people to pay off their loan that way by liquidating (I guess) a smaller portion of the crypto assets?
Antoni: Absolutely. [00:34:30] If you’re happy with where the price of Bitcoin is or you’re expecting a correction or whatever, you can instruct us to sell a portion or all of your Bitcoin to pay off the loan and have the proceeds elsewhere in the fiat currency. Or if there’s some surplus in crypto, you can withdraw that. It’s whatever you need.
Clay: And because you only make money from interest rates, you’re not charging a [00:35:00] slightly higher fee to sell those Bitcoin. It’s purely a way to pay the loan off.
Antoni: No. We don’t have liquidation fees at all. The price that we get in the market. We have a very efficient software system, which is integrated with all of the larger exchanges, some of the OTC desks. We get very, very good pricing. One of the best in the industry. As I said right now, we are only making money off the interest rates on the loan, so you [00:35:30] do not incur any costs from that.
This has to do with the idea that, as a financial institution, our bread and butter are obviously loans. Everyone who has been in the sector will tell you that. For instance, banks make their money on the interest they charge on loans. That’s where we started. The ecosystem around the Nexo wallet in the Nexo enterprise, we want to grow that.
We want to be the first place you come to buy your first $100 worth [00:36:00] of Bitcoin and to do in an efficient manner, provide you with all the services to store it, to hold your crypto, to pay, to receive, to borrow, hopefully at some point to buy stocks with it.
We can have an entire separate episode to talk about the tokenization of the world. Something I’m personally very excited about.
Clay: Hey, this is Clay cutting in from the editor’s booth to explain what Antoni means by “tokenization of the world.” [00:36:30] He is referring to the idea that blockchain enables people to split all kinds of physical or illiquid assets into digital shares that can be easily traded, just like stocks are traded today. We covered the concept in detail in our three-part security token documentary entitled, Tokenize The World. If you haven’t heard it yet, I encourage you to check it out at securitytokendocumentary.com. There’s also a link in the show notes. All right, back to the show.
Antoni: But Nexo is going to be a one-stop 360-degree [00:37:00] solution for all things crypto and beyond.
Clay: You mentioned that the wallet allows people to purchase their first crypto asset. You offer zero fee fiat on-ramps. Is that correct into crypto?
Antoni: Right now, we have the Nexo OTC desk, where even today we allow and have the functionality for larger clients to exchange fiat for crypto and [00:37:30] crypto for fiat. We do have the on and off ramp to and from fiat. Even today, we are in the process of automating all of that so that it’s fully automated on the platform and it can go down to as little as a few dollars. We’re working with various providers to help us accomplish that in the most effective way.
For the time being, we do not charge anything for that. [00:38:00] We make enough money off the interest and we want to have all the auxiliary solutions and functionalities for you in place, enjoy the Nexo wallet, conduct all your business transactions, investment strategies, just anything you can think of, via the Nexo wallet and on the Nexo platform.
Clay: Are you saying you don’t make money from your OTC desk? you’re not taking one side of the trade and trying to generate [00:38:30] revenue from that as a trading desk?
Antoni: No. Right now the trading desk, as I said, is for the larger clients, for our premium customers. More likely than not, they do have a loan in place. We already are making money off of that. We don’t charge them for on and off ramps.
Clay: Let’s transition to chapter three, the history of collateralized asset-backed [00:39:00] lending before Nexo. When you consider the space and how far we’ve come and where we’ve come from, what was happening prior to services like Nexo? How are people solving the problem of needing to take out a loan against their crypto assets? Where there bulletin boards or various places where people were doing this in informal ways?
Antoni: Before Nexo and before the space got institutionalized in any meaningful sense, [00:39:30] all the lending was P2P. People meeting up in chat rooms and forums, and conducting their activity. They’re in a very untransparent way. Predominantly, the activity was placed around Bitcointalk. When we talked earlier about the Genesis of Nexo and Costa was exploring that, there were these lending folders [00:40:00] bursting with activity. There were posts which got 20,000 replies, and then you see posts having hundreds of thousands of views, manuals of how to deal with it, whom you can trust.
There was a voting merit system, people you should trust, people you should ignore at the various rating systems and metrics recommendations, how would [00:40:30] people would look like, how many posts this person has, what other people were talking about. It’s just very, very dynamic but very nascent place as P2P lending ultimately almost always is very inefficient.
Of course, there were lots of reports of exit scams where people would be buying and selling reputable accounts so that they can generate a lot of collateral [00:41:00] and Bitcoin moving the way it was moving. All of a sudden, you could be having 5X or 10X worth of Bitcoin on what you gave somebody in dollars via their PayPal’s banking accounts or whatever. A lot of people got burned and it was just ripe for somebody with the background and the expertise to develop a product and the services surrounding them in a [00:41:30] very structured and institution-like way. That’s what we did in Nexo.
Clay: In these forums, was there any way to prevent against exit scams or were you just believing that whoever was on the other end, that they would act in a trustworthy manner? What was done? Was there just lists of trusted providers? Was there anything else? What were people doing?
Antoni: The curious thing is that all the folders and all the posts are still out there. I checked them out today [00:42:00] just to refresh my memory. Anyone who’s curious can check out Bitcointalk and search for lending. We’re talking about the first pulse. They’re 2011–2012. This is pre-smart contract, pre-anything but Bitcoin. It was just a lot of trust in the abstract group within people is required to conduct such a transaction. You have to be almost religiously confident [00:42:30] that the other person is going to come through on their promise.
The rating system and the recommendations, but even those when the collateral is getting 5X–10X, the temptation rises proportionately. There was no effective way of actually preventing those scams. Truth be told, it’s the same with a lot of institutions even nowadays. [00:43:00] Every other day there’s a new crypto lender in this. I am sure that a lot of those people throughout the world would be tempted by such concepts where they can make fairly easy money. But in the past, even more so. This is pre-chain analysis and all the analytical tools where Bitcoin was virtually untraceable.
Clay: That’s right and as a business founder, it’s probably a really [00:43:30] good sign in terms of product market fit to see that people were engaging in these kinds of activities and wanting this kind of service, so definitely points to the demand and validating the business model prior to starting.
Antoni: I don’t know how people get their ideas for businesses, but this is the most natural way. You got to see something that has demand for it. Sitting in your room and thinking of what would be best for the world is probably a useful [00:44:00] exercise just on an intellectual level, but if you’re trying to run a business, you’ve got to make sure that this is something that people will want. That is what actually makes it surprising, that for three, four, five years maybe, there wasn’t a serious solution to that problem. It is also the incredible opportunity that we had at Nexo that nobody had done it before.
Clay: Let’s kick-off chapter four, [00:44:30] which is about the current state of crypto asset-backed lending. Do you have a sense for the size of a market? Has there been anything published that you know of, that speaks to the total amount of Bitcoin-backed or crypto asset-backed loans that have been issued? Do you have a sense for that?
Antoni: I think it’s very important to define what exactly we mean by crypto-based lending. We are predominantly in the business where you place [00:45:00] digital assets such as Bitcoin, Ethereum, XRP, and you get a credit line in fiat currency or stable coin. And that, in my estimate, is somewhere around $5 billion a year market as such.
It gets much, much larger if you start to count interest-bearing accounts on Bitcoin, Ethereum, and short-term duration [00:45:30] loans like extending Bitcoin to a short seller who’s looking to make a quick buck from a correction of the price. It really comes down to what you actually include in crypto lending. It could be anywhere between $5 billion and $20 billion right now, but this is a very nascent industry.
This is going to grow exponentially with the tokenization of the world that we’re [00:46:00] seeing today. We see just about anything getting tokenized from real estate. The total market value of real estate in the world is $200 trillion. Stocks are another $78 trillion. Gold is being tokenized and we are very excited to be one of the very first companies to extend loans against tokenized physical gold. [00:46:30] Gold is another $7 trillion. So, lots and lots of trillions which will make the total addressable market very different from the one we have today.
Next, of course, we’ll be there to do the lending against all of those assets. It is truly revolutionary because we are going to see across the board and across the various jurisdictions that do not have access to our western-like wealth [00:47:00] creation, wealth management, a lot of unbanked people will get their first exposure to what is it like to have access to Apple stock for just $5. Just because you have an iPhone and a company like Nexo provides you with the infrastructure and another company has tokenized that asset. It is going to be a truly phenomenal world and the total addressable market is going to be much, much different than [00:47:30] the one we have today.
Clay: I can completely agree with that. Fixed income markets, bond markets generally are much larger than the stock markets or the capital markets in many countries. That’s absolutely a notable. You’ve got the M1 and M2 money supply. The bond market is much much larger. Then, you get into derivatives and things start going really crazy.
What’s the current state of regulation? Is this [00:48:00] space regulated? Are you regulated like any other crypto exchange? Might be that there’s some amount of KYC and AML required to issue fiat? What does the regulatory landscape look like?
Antoni: It’s quite dynamic. It varies from jurisdiction to jurisdiction. The financial task force has recently issued guidelines which will become mandatory for all blockchain companies, especially even more so [00:48:30] if you have on and off ramps to fiat currencies.
Clay: Hey, Clay again to explain what Antoni means by “financial task force.” He’s referring to the Financial Action Task Force or FATF, an intergovernmental organization that combats money laundering. The FATF recently issued guidelines according to which crypto exchanges must include customer information or identity data with cryptocurrency transfers, just a bank would. Another name for this is KYC/AML or Know Your Customer Anti-Money [00:49:00] Laundering. Okay, back to the show.
Antoni: The AML KYC procedures in the very near future are going to be quite different than what we have had in the past few years. To a certain extent, that is welcome and it’s unrealistic to think that crypto and Bitcoin can remain under the radar forever because it’s just not how the worldworks today. There’s always going to be the Bitcoin [00:49:30] maximalists and the crypto anarchists who say it should remain pure as it is, but it’s just not realistic. It’s just not the way that we are going to bring the next billion people into the blockchain space and imbue them with the vision, the passion, and the spirit that all of us that are early in the space have.
The regulatory landscape is quite dynamic. You have all sorts of countries and jurisdictions passing legislation. [00:50:00] Lichtenstein now has a separate law which comes into force early next year, which will regulate precisely how crypto companies are to be oversighted and regulated. Switzerland is working on something similar, the States obviously taking the lead here. It’s quite dynamic. It is safe to say it is going to be more KYC and AML and this has to do [00:50:30] with the maturing of the space and the institutionalization of the space.
We at Nexo are a regulated financial institution, have been so for a while, and we are on a very aggressive licensed acquisition mission. As I mentioned earlier, in the States, in Asia, in Europe, just making sure that we comply with all of the regulatory prescriptions so that this guarantees that we can [00:51:00] continue to provide our current services, but also this would allow us to develop additional ones which are going to be to the benefit of all.
Clay: Let’s transition to chapter five, which is about the future. It seems there’s a lot of things happening in this space. There’s decentralized finance. You’ve got more and more exchanges that are offering value-added custodial services, where they are issuing loans, where you can make money from staking [00:51:30] or you can earn interest. It seems there’s a lot of consolidation of services happening where, once you’re holding funds, you can do a lot of things with them. You can exchange them, you can earn interest on them, you can issue loan. Where do you see all of this heading?
Antoni: If I had a crystal ball. There’s a saying that I like a lot. I think it was Lloyd Blankfein who this quote [00:52:00] is attributed to. He said something like, “Be an excellent predictor of the present.” I think that’s good enough. If you can grasp of what is happening, you have a slight edge about the future. What I’m seeing right now is there’s consolidation of the space, especially with the exchanges as you mentioned and the institutionalization of the space. We talked about the tokenization of the world, we are getting [00:52:30] ready for that. Obviously, it’s going to take longer than some would like and anticipate. I’m personally quite impatient for that to progress more quickly.
With regards to Nexo, the most exciting part that is up next is the enterprise API. This has to do with the idea that we are a financial institution as much as a software [00:53:00] company. The late Steve Jobs was always talking about Apple being a software company. This was very important to him and I didn’t understand it at the time what he meant by that. The iPhone was just three or four years old. They were making huge amounts of money from the hardware, predominantly, but he always was very particular in correcting everybody and saying that Apple is a software company.
I think this is very important [00:53:30] about for just about any company, not just the blockchain space to have the software aspect in mind because ultimately, this is what is going to be all about. Having your particular activity (in our case being a financial institution) and all of that encapsulated by an API which can be plugged in into different businesses and combined [00:54:00] with different businesses. This has got me terribly excited.
Right now, we’re working with a very interesting bank in Europe and nobody knows this. I’m going to say this as an exclusive here on this podcast because it’s going well. We are working with a bank in Europe, it’s an older bank which has the mindset that crypto and blockchain is the next best thing. They are choosing [00:54:30] us as a partner, precisely because of this enterprise API which would give them an infrastructure which they cannot develop on their own. This is an incredible value, all the more because this particular bank has very interesting ties and strong connection is a perfect gateway to Asia.
I’m not gonna say anything more, not to jinx the deal, and how it’s going, but my thoughts about the future and [00:55:00] this direction that being a financial institution is just as important to be a software company, if not more so. The future is going to be very, very exciting.
Clay: What can you say about the nature of your relationship with the bank that it would allow them (with you as a back-end service provider) to issue loans on crypto? Is that the nature of it or is it completely you can’t talk about it yet?
Antoni: I can talk about [00:55:30] certain aspects. We’re talking about custodianship where you would have your funds at a very, very well-capitalized tier one ratio being in the high double digits. This gives you unprecedented peace of mind. We would be providing the infrastructure for all sorts of landing on and off ramp to fiat. A whole lot of possibilities. I don’t [00:56:00] want to tip off any of the competitors right now because I know they will be listening and I’ve seen them trying to emulate our model before. Hopefully by the time the deal is done, we are going to be way ahead.
Clay: Essentially, they can extend their offerings in a variety of ways that interact with the crypto sphere. I guess I could just transition to our final question. If you could wave a magic wand and [00:56:30] instantly do something positive for the crypto space, what would it be?
Antoni: That’s an excellent question. I would go back to my roots of being a legislator and provide the perfect piece of legislation which would be very business-friendly, very concise, very clear, and give the ground work of very minimalistic approach of what companies need to do [00:57:00] and comply with, in order to be a blockchain company in the traditional world, so they wouldn’t have to worry about any regulatory uncertainty. If they’re within the framework of this legislation, they need not worry about anything at all and they can focus on developing useful, user-friendly, user-centric products and services which will be [00:57:30] to the benefit of anyone.
As a second tip with the magic wand would be certainty with regards to Bitcoin. I don’t lose any sleep all night, but because it’s at the back of my head is the possibility of coordinated inter-governmental action against Bitcoin. Sort of like what happened in the States after the recession in the 1930s [00:58:00] where they outlawed gold. Something like that happening to Bitcoin worries me. Not necessarily because you can censor it, but now we can talk about concentration of hash power and mining power and that’s a whole another set of problems.
The majority of people don’t want to be criminals. In order to say Bitcoin is illegal, a lot of people would just give up on that the way they deposited their gold during the 1930s, got whatever amount [00:58:30] of dollars for each ounce. Not because they couldn’t bury it in the backyard, but it’s just people don’t want to be criminals. Unequivocal clarity as to regards with the stance of Bitcoin would be perhaps the first thing I’ll do with the magic wand and then the regulatory piece. [00:59:00]
Clay: Well that concludes my conversation with Antoni Trenchev from Nexo. I hope you enjoyed it. Before you go, I want to mention that since we’ve started producing episodes at a much higher rate, we now have room for a few more sponsors. If you like the work we do and would like to support this show, then a sponsorship might be a good fit for you.
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All right that wraps things up for this week. Stay tuned for next week’s episode. Until then take care.
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