California regulators have fined digital asset platform Nexo $500,000 for issuing thousands of "unlicensed loans" to at least 5,456 residents in the state. This penalty adds another enforcement action to the long-running regulatory challenges Nexo has faced in the United States.
The California Department of Financial Protection and Innovation stated in a declaration released on Thursday that an investigation found Nexo Capital Inc., an entity under the Nexo Group registered in the Cayman Islands, provided cryptocurrency-collateralized personal and commercial loans without holding a valid state license. Furthermore, the platform failed to assess borrowers' repayment capacity, existing debt status, or credit history.
"Lending institutions must comply with legal regulations to avoid issuing high-risk loans that harm consumer rights—cryptocurrency-backed loans are no exception," said KC Mohseni, Commissioner of the California DFPI, in the statement.
Nexo is also required to transfer all funds belonging to California residents to a licensed U.S.-based affiliate within 150 days.
The cited violations occurred between July 26, 2018, and November 22, 2022. During this period, Nexo aggressively expanded its crypto-backed lending operations, but ultimately exited the U.S. market amid increasing regulatory scrutiny from both state and federal authorities.
Following a series of regulatory crackdowns, Nexo has now discontinued its traditional crypto lending products for U.S. customers, retaining crypto-backed borrowing services only in overseas markets.
This marks another confrontation between Nexo and California regulators. Two years ago, the DFPI led a multi-state task force that reached a $22.5 million settlement with the company over its unregistered "earn interest product."
That same year, the U.S. Securities and Exchange Commission charged Nexo for failing to register its crypto lending product, imposing an additional $22.5 million fine, bringing the company's total U.S. penalties for 2023 to $45 million.
Kadan Stadelmann, Chief Technology Officer of Komodo Platform, noted in an interview with Decrypt, "The fact that Nexo failed to conduct even the most basic assessment of borrowers' repayment ability for thousands of loans undoubtedly reveals systemic compliance flaws. Consumers should be wary of such warning signs."
He pointed out that California's regulatory framework is crucial for protecting consumer rights, emphasizing that the state's rules "lean toward requiring over-collateralization to mitigate borrower default risks. They also include multiple provisions focused on protecting borrowers, measures designed to prevent the crypto sector from repeating the mistakes of the 2008 financial crisis."
Nexo exited the U.S. market in late 2022 following multiple regulatory enforcement actions. Now, with the DFPI issuing this fine and its reliance on "neither admit nor deny" settlement agreements drawing scrutiny, the platform's plans to re-enter the U.S. market are facing strict examination.
Stadelmann stated, "This type of 'neither admit nor deny' settlement allows Nexo to avoid admissions of guilt that could trigger shareholder lawsuits or hinder future license applications." He also warned that as regulators delve deeper into Nexo's compliance record, the company "could face further admissions of guilt, higher fines, or the appointment of regulatory monitors."
He added wryly, "Other crypto firms, including FTX and Binance, have faced similar regulatory penalties but continue to operate. Why shouldn't Nexo?"
As of now, representatives for Nexo have not responded to requests for comment.