8 states file enforcement actions against digital asset lender Nexo

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Eight U.S. states, including New York and California, have brought enforcement actions against Nexo Group, one of the few digital asset lenders that seems to have escaped unhurt from this year’s mass ‘crypto contagion.’

The regulators, who also include Kentucky, Maryland, Oklahoma, South Carolina, Kentucky, and Washington, accuse Nexo of offering unregistered securities through its “Earn Interest Product.” The lender also failed to provide the necessary disclosures to investors regarding the risks involved.

In its enforcement action, California’s Department of Financial Protection and Innovation (DFPI) claimed that the lender promised its investors annual interest rates of up to 36%, way higher than what regulated mainstream financial products offer.

Vermont’s Department of Financial Regulation (DFR) added that as of July 31, over 93,000 U.S. residents had invested $800 million in the company’s interest-earning accounts. Of these, just 70 were from Vermont, and collectively, they had invested just over $14,000 with the lender.

The enforcement actions come at a time when some of the biggest players in digital assets lending have collapsed and filed for bankruptcy or faced mounting regulatory scrutiny.

Celsius Network and Voyager Digital are the biggest casualties of this year’s meltdown. Both filed for Chapter 11 bankruptcy after poor leadership and overexposure to ill-fated companies and projects—such as Three Arrows Capital and LUNA/UST—leading to their collapse. Other smaller lenders haven’t been spared either, with some like Vauld also resorting to bankruptcy.

Nexo has seemed immune to many of the industry’s biggest pitfalls. While its rivals were crumbling, the lender was said to be on the prowl for acquisitions. It has been in talks for months to acquire the Peter Thiel and Coinbase-backed (NASDAQ: COIN) Vauld for months now—earlier this month, announcing it would take 30 more days to consider the acquisition.

The lender also recently acquired a minority stake in Summit National Bank, a financial institution licensed and regulated by the U.S. Office of the Comptroller of the Currency (OCC). In addition, it announced a few weeks ago that it was venturing into spot, futures, and margin trading through Nexo Pro.

‘Nexo lied to investors,’ regulators say

While standing tall as most of its rivals collapsed is a big achievement, Nexo’s Achilles’ heel lies in its interest-earning accounts.

In her enforcement action, New York Attorney General Letitia James accused the lender of operating without a license despite several warnings from her office.

“Cryptocurrency platforms are not exceptional; they must register to operate just like other investment platforms. Nexo violated the law and investors’ trust by falsely claiming that it is a licensed and registered platform. Nexo must stop its unlawful operations and take necessary action to protect its investors,” James stated.

The NYAG dug further into Nexo’s business model, accusing it of failing to disclose to investors that they gave up control of the digital assets to the company. Its T&Cs give it control of a client’s assets and give it the right to “convert, pledge, re-pledge, hypothecate, rehypothecate, sell, lend, or otherwise transfer, dispose of or use any amount of any digital assets.”

“These crypto interest accounts are securities and are subject to investor protections under the law, including adequate disclosure of the risk involved,” Clothilde Hewlett, a commissioner at California’s DFPI, stated, commenting on the action.

She added that Nexo had over 18,000 Californian clients who had locked over $175 million in its illegal interest-earning accounts.

In its response, the lender claimed that it ceased offering interest-earning accounts earlier this year as soon as it learned of the SEC’s stand against such accounts. 

“Nexo is committed to finding a clear path forward for the regulated provision of products and services in the U.S., ideally on a federal level,” the company said in a statement sent to media outlets.

Nexo is just the latest in a growing list of digital asset lenders being pursued by U.S. regulators. BlockFi was among the first to be targeted, and after months of back-and-forths, the lender ended up paying $100 million to the SEC and 32 state regulators to settle the claims.

Watch: SEC Commissioner Hester Peirce on Bitcoin Association’s Blockchain Policy Matters