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August 16, 2022

Law360 (April 5, 2021, 6:10 PM EDT) — Cryptocurrency lending platform Nexo wrongly suspended Ripple’s digital asset XRP as a payment option and liquidated its customers’ collateral to the tune of over $5 million in damages, a proposed class of customers has told a California federal court.

Nexo Financial LLC customer Junhan Jeong and a proposed class of customers said Thursday that Nexo breached its contract with users by freezing XRP as a usable asset on its platform without notice. Nexo also proceeded to sell off the XRP that customers were using as collateral and kept the proceeds for itself, the complaint says.

“Nexo’s suspension of XRP payments and liquidation of these customers’ collateral … were unlawful,” the complaint said. “These customers are entitled to recover the value of their XRP when Nexo suspended its use and the value of their liquidated collateral as of breach.”

A Nexo representative told Law360 on Tuesday that the liquidation had been automatic and was in line with its terms and conditions. 

“As per our terms and conditions, some of clients’ collateral was liquidated because they had failed to repay their credit lines or add collateral as the value of their existing XRP collateral decreased,” the representative said. 

The suit is part of the ongoing fallout from the U.S. Securities and Exchange Commission‘s December lawsuit against Ripple Labs Inc. and the subsequent collapse in value of its digital asset, XRP. In this instance, Nexo suspended customers’ use of XRP the day after the SEC filed suit against Ripple.

Nexo is a banking and lending platform that allows customers to use cryptocurrency assets as collateral to borrow cash, according to its website. It also offers interest-earning accounts and boasts over 1 million users and $12 billion in assets under management, according to its website.

Nexo requires borrowers to maintain a certain ratio between the amount of cash borrowed and the value of their collateral, the complaint says. If the ratio becomes too high, customers must stake additional digital assets, pay back the loan, or in some cases, Nexo will sell their collateral after notifying the customer, according to the complaint.

On Dec. 23, the day after the SEC accused Ripple of conducting unregistered securities offerings, the price of XRP fell by roughly half over the course of hours, from about $0.45 to about $0.21, the complaint says. Nexo on Dec. 23 suspended the use of XRP as collateral or to pay off loans, but didn’t provide notice to customers, Jeong alleges.

Customers also couldn’t sell XRP on the market and use the proceeds to bolster their loan-to-value ratios, since removing the XRP in the first place could cause the ratio to spike such that Nexo would liquidate their collateral, the complaint says.

“Nexo thus effectively prohibited these customers from maintaining their [loan-to-value] ratios and then punished them for not maintaining their [loan-to-value] ratios,” the complaint said.

Nexo then sold off “massive quantities” of the collateral XRP, Jeong says. Jeong argues that this was contrary to Nexo’s assertion that it doesn’t have ownership rights over users’ collateral.

Jeong argues that Nexo’s move wasn’t motivated by concerns about XRP’s legal status, since it suspended use of the asset for customers overseas as well as in the U.S. It also went on to sell off XRP itself, the complaint says.

“Nexo initiated the suspension of XRP payments because it did not want to be left holding XRP at its decreased value — not because the SEC’s announcement had in any way precluded the use or sale of XRP,” the complaint said.

The Nexo representative contested Jeong’s assertion that users hadn’t been notified about the liquidations. 

“Liquidations occur automatically as [loan-to-value ratios] reach 83.3%; borrowers receive three margin calls prior to liquidation,” the representative said. “”There’s no exception to this rule — it’s an automatic process, so the claimants were notified.” 

The representative also said the SEC’s decision to view XRP as a security could have influenced international regulators. 

“Generally, when an asset is deemed a security in the U.S., other countries are quick to follow in their footsteps and declare said asset a security, too,” the representative said. “The lawsuit against Ripple would undoubtedly cause significant uncertainty as to the treatment of XRP and transactions with it for the foreseeable future, so, upon advice by our legal counsel, we had to undertake the necessary actions to protect our clients and business.”

Nexo’s customers are seeking restitution for their alleged losses as well as a court ruling about the extent of Nexo’s contractual rights. The plaintiffs argue that those rights do not include the right to suspend customers’ use of XRP for payments, and that Nexo doesn’t acquire ownership of the collateral that customers have posted.

Edward Normand of Roche Freedman LLP, counsel for the plaintiffs, highlighted a statement that Nexo released toward the end of December that explained its decision-making around the XRP suspension.

“What is from our perspective really noteworthy about that statement is how extreme Nexo’s claims of certain contractual rights were, and how unfair and onerous Nexo’s interpretation of those contractual rights were,” Normand told Law360 on Monday. “The lawsuit involves a combination of trying to get restitution for clients who are hurt, and trying to get clarification on the contractual rights that Nexo claims, which are very extreme and not beneficial to its clients.”

The Nexo spokesperson argued that users were responsible for understanding the company’s terms and conditions. 

“We simply can’t be held responsible for any client’s personal decision to not read up and any failure to repay loans in time, considering no technical errors occurred at our end and all repayment options, bar with XRP, remained available,” the representative said. 

Jeong is represented by Kyle W. Roche, Edward Normand, Stephen Lagos and Katherine Eskovitz of Roche Freedman LLP.

Counsel information for Nexo was not immediately available.

The case is Junhan Jeong v. Nexo Financial LLC et al., case number 5:21-cv-02392, in the U.S. District Court for the Northern District of California.

–Additional reporting by Dean Seal and Emilie Ruscoe. Editing by Orlando Lorenzo.

Update: This article has been updated with comment from Nexo.