Crypto lender Nexo investigated by 8 US state regulators

abdelaziz Fathi

State securities regulators in New York, California, Kentucky, Maryland, Oklahoma, South Carolina, Washington and Vermont are investigating crypto lender Nexo for allegedly failing to register its Earn Interest Product.

The probe is apparently led by the California Department of Financial Protection and Innovation (DFPI), which revealed that it had joined other regulators to bring action against Nexo. The DFPI has been already investigating offerings of interest-bearing crypto-asset accounts as a part of a broader scrutiny against cryptocurrency lending platforms.

“The DFPI has undertaken aggressive enforcement efforts against unregistered interest-bearing cryptocurrency accounts. These crypto interest accounts are securities and are subject to investor protections under the law, including adequate disclosure of the risk involved. Collectively, these actions protect investors while ensuring that California remains an ideal setting for responsible financial innovation,” said DFPI Commissioner Clothilde Hewlett.

In a joint statement, the eight US state regulators highlighted that Nexo promotes annual interest rates of up to 36% on crypto deposits, which are significantly higher than rates for short-term, investment-grade, fixed-income securities or bank savings accounts.

Nexo replied to these allegations, elaborating that since the SEC guidance on earn products in February 2022, it has voluntarily ceased the onboarding of new U.S. clients for Earn Interest Product as well as stopped the product for new balances for existing clients.

The effort continues a yearlong battle by California and other state watchdogs to bring crypto interest accounts under their regulatory domain. BlockFi was the first lender to fall under their microscope and it ultimately settled with state and federal regulators.

The crypto lending platform, backed by billionaire Mike Novogratz’s Galaxy Capital, settled with Iowa regulator for an administrative fee of $1 million without admitting or denying the charges. BlockFi also agreed to pay a $50 million penalty to the SEC and additional $50 million in fines to 32 states to settle similar charges.

The move comes as US regulators signaled a big change in policing cryptocurrencies and the growing Defi sector after they blocked Coinbase from launching a new crypto lending product. The SEC officials have increasingly been talking about a need to crack down on these products, which are essentially unregistered interest-bearing accounts, the agency claims.

Before the recent crisis, the use cases presented by major players reflect that the lending trends are shifting to a reliance on digital assets to support business’ operations rather than for only betting on the short term price moves. Specifically, there was substantial interest from the institutional players to borrow in order to facilitate a specific strategy such as for shorting, arbitrage, or working capital purposes.

SEC’s head Chair Gary Gensler called on Congress to give the agency more authority to better police crypto trading and lending platforms, which pay customers rates higher than most bank savings accounts.

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