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Eight states file enforcement actions against crypto-lending platform Nexo

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New York State Attorney General Letitia James speaks at a news conference after former U.S. President Donald Trump’s White House chief strategist Steve Bannon arrived to surrender, in New York, U.S., September 8, 2022.
Caitlin Ochs | Reuters

Eight states announced on Monday they’re bringing actions against the crypto lending platform Nexo Group in connection with its unregistered, interest-bearing cryptocurrency product.

State regulators in California, Kentucky, New York, Maryland, Oklahoma, South Carolina, Washington and Vermont allege Nexo offered customers interest earning accounts without first registering them as securities and providing required disclosures. Without access to these financial statements, state regulators say investors could not make informed investment decisions.

The filings also state that Nexo misrepresented to investors that they are a licensed and registered platform.

These interest earning accounts, known as “Earn Interest Product,” allowed investors to deposit assets with Nexo in exchange for earning yields as high as 36% on their deposits.

Nexo’s terms and conditions said the company had the ability to deploy customer assets at its “sole and absolute discretion.”

According to the order filed in Vermont, “investors have no part in selecting, monitoring, or reviewing the revenue-generating activities that Respondents utilize to earn this interest.”

The Vermont order states that as of July 31, 2022, more than 93,318 U.S. residents had invested more than $800 million in these accounts.

In response to more than 10,000 of its residents being affected, New York’s Attorney General filed a lawsuit against the cryptocurrency platform.

“Cryptocurrency platforms are not exceptional; they must register to operate just like other investment platforms,” said New York Attorney General Letitia James. “Nexo violated the law and investors’ trust by falsely claiming that it is a licensed and registered platform. Nexo must stop its unlawful operations and take necessary action to protect its investors.”

In February, Nexo prevented U.S. investors who had not yet opened a Nexo account from investing in the Earn Interest Product or adding additional cryptocurrency into their accounts. The orders states filed further prevent Nexo from offering this product to residents until it meets the necessary registration requirements.

In a statement, Nexo differentiated itself from other platforms that have experienced financial difficulty, “We have 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….As the recent months have clearly underlined, Nexo is a very different provider of earn interest products, as showcased by the fact 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.”

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