Nexo Fined for Unlicensed Lending Practices
The California Department of Financial Protection and Innovation has imposed a hefty fine of $500,000 on Nexo, a digital assets service provider, after discovering that the company granted thousands of loans without proper licensing. The investigation revealed that between July 26, 2018, and November 22, 2022, Nexo Capital Inc., based in the Cayman Islands, issued crypto-backed loans to at least 5,456 residents of California without assessing their repayment abilities or creditworthiness, as mandated by state regulations.
Regulatory Compliance and Consequences
DFPI Commissioner KC Mohseni emphasized the importance of compliance in lending practices, stating,
“Lenders must follow the law and avoid making risky loans that endanger consumers—and crypto-backed loans are no exception.”
As part of the ruling, Nexo is required to transfer all funds belonging to California customers to a licensed affiliate in the U.S. within the next 150 days.
The penalties are the latest chapter in Nexo’s ongoing regulatory challenges in the United States. The company had previously faced scrutiny from regulators, having ceased its popular crypto lending products for U.S. clients due to growing legal pressures. Notably, in 2021, the DFPI collaborated with a multistate task force that secured a $22.5 million settlement for Nexo regarding its unregistered Earn Interest Product.
Ongoing Regulatory Challenges
In addition to the state-level enforcement, the U.S. Securities and Exchange Commission also charged Nexo this year, resulting in another $22.5 million fine, which brings the firm’s total penalties in the U.S. to $45 million for 2023. As the regulatory environment for crypto firms becomes more stringent, Nexo’s attempts to re-enter the U.S. market are now clouded by these recent fines and concerns over its compliance history.
Industry Perspectives
Kadan Stadelmann, CTO of Komodo Platform, echoed concerns regarding Nexo’s practices, pointing out the absence of basic ability-to-repay assessments for many borrowers, which raises significant compliance issues. He praised California’s regulatory framework, advocating for borrower protections that prevent a financial crisis similar to what transpired in 2008.
As for the future of Nexo, Stadelmann noted that the company might still face increased scrutiny, additional fines, or even regulatory oversight due to its current compliance status. He remarked on the broader context of regulatory penalties in the crypto industry, comparing Nexo’s situation with that of other companies like FTX and Binance, which have also faced regulatory challenges yet continue to operate.
