Lede
Nexo Capital has reached a settlement with the California Department of Financial Protection and Innovation (DFPI), agreeing to pay $500,000 to resolve allegations concerning its lending operations. The state regulator identified that between July 2018 and November 2022, the company issued at least 5,456 consumer and commercial loans to California residents without the necessary licensure. These activities were characterized as unlawful acts and practices that failed to comply with established consumer financial protection laws in the state.
The core of the regulator’s complaint focuses on Nexo Capital’s failure to conduct adequate financial assessments of its borrowers. According to the DFPI, the firm generally did not evaluate a borrower’s ability to make timely repayments or examine their existing debt and credit history. Furthermore, the company did not review other essential documents related to a borrower’s overall financial health before extending credit. This lack of due diligence created a situation where loans were distributed without a clear understanding of the recipient’s capacity to fulfill their obligations.
DFPI Commissioner KC Mohseni underscored the necessity for all lenders to operate within the bounds of the law, specifically highlighting the dangers of making risky loans that endanger consumers. Mohseni explicitly stated that crypto-backed loans are not exempt from these regulatory expectations. The settlement underscores the state’s initiative to bring digital asset lending under the same level of scrutiny as traditional financial services to ensure market stability and consumer safety.
Context
The investigation by the DFPI revealed significant deficiencies in Nexo Capital’s internal procedures, most notably a total lack of underwriting policies. The regulator argued that this void in policy directly heightened the risk of borrowers defaulting on their loans. By not performing standard credit checks or verifying financial backgrounds, Nexo issued thousands of loans that the state deemed inherently risky. The loans in question, issued over a four-year period, lacked the foundational protections usually required for consumer and commercial credit products.
According to the regulatory findings, the period between July 2018 and November 2022 saw Nexo operating without a valid license while engaging in these lending activities. The DFPI emphasized that the company failed to evaluate several key metrics of financial stability, including the borrower’s existing debt and their broader financial condition. This systemic failure to assess repayment ability is a primary concern for the DFPI, which seeks to prevent the proliferation of high-risk debt within the state’s economy.
While crypto-backed loans are often structured differently than traditional bank loans, the DFPI maintained that this does not relieve the lender of the duty to evaluate the borrower. The regulator’s stance is that the absence of proper underwriting creates an environment where defaults are more likely, potentially leading to financial harm for consumers who may lose their collateral. The lack of documented assessment regarding the borrower’s overall financial condition was a central theme in the state’s findings against the crypto firm.
Impact
As part of the settlement, Nexo Capital is required to undergo a restructuring of its California-based operations. The firm has been ordered to transfer all funds belonging to California residents to Nexo Financial LLC within a 150-day window. Unlike Nexo Capital, Nexo Financial LLC is a US-based affiliate that currently holds a California Finance Lenders License with the DFPI, bringing the management of these accounts under a licensed and regulated entity that complies with state standards.
This $500,000 payment to California’s financial regulator adds to a series of legal and regulatory hurdles the company has faced in the United States. Previously, in February 2023, Nexo reached an agreement to pay $45 million in penalties to various US regulators. That broader settlement was linked to the company’s yield-bearing Earn Interest product, which allowed users to earn daily compounding yields on certain cryptocurrencies by loaning their digital assets back to the platform. Following that agreement, the company stated it would end the Earn Interest product for its US-based customers.
The transition of funds to a licensed affiliate marks a significant shift in how the company must operate within the state. By forcing the migration of resident funds to a regulated entity, the DFPI aims to ensure that future lending and financial activities are conducted under the appropriate oversight. This move highlights the closing gap between crypto-native financial services and the rigorous licensing requirements of state financial regulators.
Outlook
The future of Nexo’s service offerings in the United States remains constrained following its decision to exit certain market segments. The termination of the Earn Interest product in early 2023 signaled a retreat from offering high-yield products that regulators had scrutinized. Moving forward, the company must finalize the transfer of assets to its licensed affiliate, Nexo Financial LLC, by the 150-day deadline to ensure compliance with the DFPI’s licensing standards.
The enforcement action serves as a reminder that regulators are increasingly focused on the underwriting standards and licensing status of crypto-lending platforms. Commissioner KC Mohseni’s emphasis on preventing risky loans indicates that future crypto-financial services in California will face continued examination. Lenders will be expected to maintain robust underwriting policies to mitigate default risks and protect the broader financial ecosystem from the fallout of unvetted credit issuance.
Nexo’s pivot to utilizing a licensed affiliate like Nexo Financial LLC may provide a template for how other firms seek to maintain a presence while meeting state-level compliance mandates. The regulatory focus on assessing a borrower’s ability to make timely repayments remains a cornerstone of the DFPI’s approach to consumer protection. As the 150-day migration process concludes, the industry will be watching to see how Nexo adapts its operational model to satisfy both state regulators and its remaining user base under the new licensed structure.
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