TL;DR
- Nexo fined $500,000 for offering unlicensed crypto loans in California.
- The company did not assess borrowers’ ability to repay the loans.
- It must transfer all client funds to a licensed US affiliate.
The company Nexo Capital Inc. received a $500,000 fine from California regulators. The state’s Department of Financial Protection and Innovation led the investigation. The penalty responds to the issuance of crypto-backed loans without the required license.
Between July 2018 and November 2022, Nexo provided these loans to 5,456 California residents. The company, based in the Cayman Islands, operated outside the state’s legal framework. DFPI Commissioner KC Mohseni stated lenders must act within the law and avoid risky loans that could harm consumers.
Lack of Assessment and Forced Fund Transfer
The investigation determined Nexo Capital did not examine borrowers’ repayment ability. The company avoided conducting credit checks and did not assess existing debts or the general financial situation of clients. This lack of an underwriting policy significantly increased the risk of default.
Borrowers obtained loans in fiat currency or stablecoins using cryptocurrency as collateral. This process omitted usual controls in the traditional financial system, such as income verification. The DFPI detected violations of the California Financing Law and the California Consumer Financial Protection Law.
As part of the order, Nexo must transfer all California client funds to a licensed affiliate entity. The funds will go to Nexo Financial LLC, a U.S. affiliate that holds a valid license under the California Financing Law. The company has a 150-day period to complete this transfer.
This is the second enforcement action against Nexo led by the DFPI
In 2022, the department headed a multi-state investigation that resulted in a settlement with 50 U.S. jurisdictions. That prior agreement included a payment of $22.5 million. The previous lawsuit focused on Nexo’s crypto interest-earning program, which violated securities laws in several states. Nexo later withdrew from the U.S. market.
The company also faced criminal charges in Bulgaria, its country of operations. Prosecutors initially accused the company of organized crime and money laundering, charges they later dismissed. Nexo initiated $3 billion arbitration against Bulgaria following the dismissal.
The DFPI continues to supervise crypto lending platforms to ensure regulatory compliance. The agency emphasizes consumer protection in all financial services. Nexo Financial now faces pressure to comply with strict disclosure standards under its new regulated supervision.
