The cryptocurrency market tends to be quite volatile at times, and as a result, investors often have to sustain losses. However, if investors lose money because of the platform they are trading on, it is considered a punishable offense. Popular Crypto lending platform Nexo was recently accused of causing $5 million worth of client liquidations after suspending the use of XRP as collateral without warning back in December.
The lead plaintiff, California resident Junhan Jeong, has filed a class-action lawsuit against Nexo for suspending the use of XRP as loan collateral without notifying its customers prior to it. According to the plaintiff, this was a breach of the user agreement. It must be noted that the suspension closely followed the U.S. Securities and Exchange Commission’s $1.3 billion lawsuits against Ripple Labs for conducting unregistered securities offerings on Dec. 22.
Nexo is known for offering its customers the ability to borrow fiat currency or stablecoins using over-collateralized loans that are backed by crypto assets. In case of high volatility, loans often fail to meet the platform’s required loan-to-value ratio. The complaint continues, highlighting Nexo’s terms of service as stating that “Nexo will — after providing notice to the customer — sell the collateral to bring the LTV ratio back in line.”
According to Jeong, Nexo reacted to the regulator’s announcement by suspending the use of XRP as collateral, to pay down loans, and for staking on December 23. Due to this move, many were unable to support their loan positions, which resulted in wholesale liquidations across the platform.
The complaint went on to accuse that the platform unjustifiably” sold off customers’ XRP and got away with the proceeds. It said:
“Seeing the price of XRP thus drop significantly, on December 23, Nexo suspended customers’ use of XRP to stake as collateral or pay down on loans and did so without providing notice of the suspension. Nexo did so because it did not want to be left holding XRP at its substantially decreased value—not because Nexo believed that the SEC’s announcement counseled against the use or sale of XRP.”
Basically, Nexo’s suspension resulted in the loss of more than $5 million worth of its customers’ assets. The move also contradicts the company’s claim that it does not have ownership rights of a customer’s collateral. Now, Jeong is seeking restitution for the alleged losses incurred, alongside an order declaring Nexo’s contractual rights:
“Declaration regarding the parties’ contractual rights is necessary because the rights and obligations at issue are central to the very operation and use of the Nexo Crypto Credit, and because Nexo’s public statements demonstrate that the parties have a fixed and genuine dispute over those rights and obligations.”
Nexo to fight back
In a follow-up blog, Nexo responded to the lawsuit, stating:
“It is unlawful for an individual to make deliberate statements or incite other persons to do so that intend to harm the reputation of a business without any factual evidence and, as such, we are seeking full indemnity for the reputational damage we have suffered.”