California’s Department of Financial Protection and Innovation (DFPI) announced on September 26 that it was joining seven other states to issue a cease and desist against Nexo’s lending activities. The suit claims that Nexo has been offering interest-bearing securities to customers without the proper registration and disclosures required by securities law.
This is the fourth such enforcement action taken by the DFPI in 2022. The other three companies investigated by the DFPI have been BlockFi Lending, Voyager Digital, and Celsius Network.
Notably, both Voyager and Celsius have since filed for bankruptcy. While BlockFi has had its debt financed by FTX with the option to be acquired in the future. The past does not indicate a positive end for Nexo.
States Work To Protect Their Citizens
California’s DFPI claimed that the interest-bearing crypto accounts offered by Nexo are considered securities products. As such, Nexo has failed to disclose the risk involved in this product to consumers adequately. Nexo lending products have offered consumers up to 36% annual interest for depositing their crypto assets. This is significantly higher than the rates a consumer would get for depositing their money in securitized products.
Many customers have been lured in by the impressive returns without understanding the risks of investing in crypto assets. The state of New York filed a similar suit but also claimed that Nexo has been selling securities to customers without proper registration. As such, Nexo is barred from crypto sales in New York, halting its lending product. The conditions of Vermont, Washington, Maryland, Oklahoma, South Carolina, and Kentucky have all filed similar suits as California.
Nexo co-founder Antoni Trenchev responded by saying the company has been working with U.S. federal and state regulators to comply with all their offerings. He points to the fact that Nexo stopped paying interest on all new deposits to its earn product to U.S. customers at the end of February 2022. Nexo intends to comply with applicable laws to continue providing services to its U.S. customer base.
The day after California’s lawsuit, Nexo announced it had taken a stake in a federally-regulated U.S. bank called Summit National Bank. This will allow the company to offer banking services in the U.S. as a licensed institution. This move will enable Nexo to provide customers with checking accounts and crypto-backed loans. As well as being properly licensed to provide services to its U.S. customers.
At the same time, rumors have swirled across Twitter that Nexo may be the next crypto institution to declare insolvency. In a tweet, the blockchain security company Peckshield announced that $153 million worth of Bitcoin was removed from MakerDAO by a wallet confirmed to be owned by Nexo. Similar moves were made by wallets under the control of Celsius just before they declared insolvency. Nexo has responded that it was part of normal loan activities made using their on-chain assets and had nothing to do with their financial state.