Eight states, led by California and New York, have taken legal action against Nexo highlighting growing concerns about companies that offer unregistered crypto lending products.
The states are accusing Nexo of allowing consumers to deposit crypto assets in exchange for interest as high as 36% without registering its products as securities and providing material information to customers.
The “aggressive enforcement efforts against unregistered interest-bearing cryptocurrency accounts” are aimed at enforcing “investor protections under the law, including adequate disclosure of the risk involved,” Clothilde Hewlett, commissioner of the California Department of Financial Protection and Innovation, said in a statement.
More than 18,000 California residents have signed up for Nexo’s Earn Interest Product accounts, which collectively hold total investments of at least $174 million, according to the California “desist and refrain order.”
The California legal move comes shortly after the crypto industry won a significant victory in the state when Gov. Gavin Newsom vetoed a bill that would have required crypto companies to get a state license. The proposal passed overwhelmingly in the California Assembly and Senate.
The New York attorney general’s office said Nexo “failed to register and misrepresented to investors that they are a licensed and registered platform.”
“Cryptocurrency platforms are not exceptional; they must register to operate just like other investment platforms,” Attorney General Letitia James said in a statement. “Nexo violated the law and investors’ trust by falsely claiming that it is a licensed and registered platform.”
Nexo also faces legal challenges in Washington, Maryland, South Carolina, Oklahoma, Vermont, and Kentucky, according to a California DFPI representative.
Nexo said in a statement that the company has been “working with U.S. federal and state regulators and understand their urge, given the current market turmoil and bankruptcies of companies offering similar products, to fulfill their mandates of investor protection by examining past behavior of providers of earn interest products."
“Nexo has always been dedicated to running a sustainable and compliant business and welcomed, even proactively sought, regulatory clarity,” the company said, adding that it has “voluntarily ceased” signing up new U.S. clients for the Earn Interest Product.
Nexo described itself as “a very different provider” of such products,” noting that “it did not engage in uncollateralized loans, had no exposure to luna/UST, did not have to be bailed out or needed to resort to any withdrawal restrictions.”