This looks like a problem on the NX side. Loopback should not do this. I suppose there may be some strange method of setting RX and TX differently, but I do not know of such a method. Certainly the simple startup of picoterm should be valid just as you’ve used it.
Wherever you started picoterm, if you first run the command “echo $LANG”, what do you see? I am assuming it is something with “UTF-8”. If one side of a terminal uses 8-bit characters, and the other side uses some other character size, then you will get bit shifting based on the difference (e.g., mixing UTF-8 and UTF-16` would result in an “off by one byte” each time). I believe that under loopback you could not have a character size difference/shift. The interpretation of that character could change, though highly unlikely in loopback.
If $LANG says you are using “en_US” at one end, and something other than “en_US” at the other end, then the data sent would be valid and not scrambled, but the display of how the character is interpreted would indeed look scrambled. This seems unlikely in loopback mode.
If there is a bit being dropped or appended, e.g., due to one side making an incorrect assumption about stop/start bits, then there would be a bit shift at each character. This also seems unlikely in loopback, but it is worth testing.
I will assume your “$LANG” is an 8-bit character (such as from “UTF-8”). In that case the letter “U” has binary value “01010101”. The UTF-8 character “ª” (which is an odd character which won’t render correctly in normal situations) has binary value “10101010”. Note that this is a single bit shift of “U”. If you are typing in text on your loopback terminal, and you repeatedly type in the character “U” (capital U), does the garbled text alternate back and forth between correctly showing “U” and then nonsense? Or is all text nonsense?
Does your picoterm have the ability to display hex? If so, then displaying hex (or even binary) allows you to see patterns in bit shifting (versus random corruption) when the input is a repeating bit pattern.
One other bonus of the loopback is that it doesn’t use long wires, so environmental electrical noise won’t be the issue even if there is some sort of corruption, so you can assume the wiring is not an issue (at least under loopback).