CALIFORNIA – The California Department of Financial Protection and Innovation (DFPI) announced on January 12 that Nexo Capital Inc. will pay $500,000 in penalties for violating state financial laws by issuing loans to California residents without a valid license.

The company offered crypto-backed loans and services.

These loans allow a borrower to receive cash by using cryptocurrency as collateral, with the risk that the crypto can be liquidated if its value falls too low.

A DFPI examination found that Nexo, a Cayman Islands–based company, issued consumer and commercial loans to at least 5,456 Californians without assessing their ability to repay.

Before issuing loans, Nexo Capital generally failed to assess borrowers’ repayment ability, existing debt, credit history, or overall financial condition.

The lack of underwriting policies increased the risk of borrower defaults and violated the California Financing Law.

“Lenders must follow the law and avoid making risky loans that endanger consumers — and crypto-backed loans are no exception,” said DFPI Commissioner KC Mohseni. 

Lender must transfer all California residents’ funds 

The loans were made between July 26, 2018, and November 22, 2022.

In addition to the violations above, DFPI cited Nexo for two violations of the California Consumer Financial Protection Law:

• Engaging in unlawful acts or practices related to a consumer financial product or service.
• Offering or providing a financial product or service that violates consumer financial laws.

Along with the penalty, Nexo must transfer all California residents’ funds to its U.S.-based, DFPI-licensed affiliate, Nexo Financial LLC, within 150 days. Nexo Financial must comply with CFL licensing and disclosure requirements.

This is the second enforcement action

This is not the first enforcement action DFPI has taken against Nexo. In 2022, the DFPI co-led a North American Securities Administrators Association (NASAA) task force investigating Nexo’s crypto interest-earning program.

The regulators concluded that Earn Interest Product accounts are securities and require investor protections, such as registration and risk disclosures, before they can be offered and sold to investors.

The DFPI secured a $22.5 million multistate settlement with Nexo on behalf of over 50 U.S. jurisdictions for state securities law violations.