- Supporting data: Nexo originated 5,456 loans for California residents without a valid license between July 2018 and November 2022.
- Key insight: While Nexo marketed its lack of credit checks, California law requires lenders to evaluate a borrower’s ability to repay a loan.
- Expert quote: “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.
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California regulators fined cryptocurrency platform Nexo Capital $500,000 for issuing thousands of loans in the state without a license.
The California Department of Financial Protection and Innovation (DFPI) announced
The activity occurred between July 2018 and November 2022, according to
Nexo, a Cayman Islands corporation formed in 2018, provides various crypto-related financial products, including its crypto credit lines that allow customers to borrow fiat currency or stablecoins by using their digital assets as collateral.
State investigators said that Nexo Capital did not evaluate a borrower’s credit history, debt, expenses or overall financial condition before funding loans. Nexo even marketed the absence of these checks.
“With Nexo, there are no credit checks, and nothing is reported to credit agencies,” the company stated on its website, according to the DFPI’s findings.
California law, however, requires lenders to consider a borrower’s ability to repay a loan to ensure they can meet the terms of the contract.
“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 in the Wednesday press release.
Instead of assessing creditworthiness, Nexo required borrowers to overcollateralize their loans, and its terms of service gave the company the right to liquidate a customer’s crypto assets if the loan-to-value ratio ever reached 83.33%.
In addition to the fine it must pay the state, Nexo must transfer all funds belonging to California residents to Nexo Financial, a U.S.-based affiliate that currently holds a valid financing license in the state, within 150 days.
The settlement also requires Nexo to implement IP-based geo-blocking to prevent new California residents from accessing its unlicensed services.
While Nexo Capital has never held a license in California, the broader Nexo organization (Nexo Group) does hold money transmitter and consumer lender licenses in other states through various subsidiaries. The company also maintains a partnership with Mastercard for its crypto-backed card.
For banking functions, Nexo
California’s penalty against Nexo follows a major January 2023 settlement where the company agreed to pay $45 million in penalties
In that case, officials charged Nexo with failing to register the offer and sale of an interest-earning product it offered, which the SEC deemed a security.
Following those charges, Nexo announced it would phase out all products and services in the United States. In April, it
For traditional bankers, the Nexo case highlights the continued regulatory focus on ensuring a level playing field between traditional financial institutions and “non-bank” fintech competitors.
The DFPI said crypto entities must adhere to the same consumer protection laws that other lenders operating in the state do, and it continues to investigate other crypto firms for similar violations.
The penalty also serves as a warning that California does not accept collateral-only lending as a substitute for assessing a borrower’s actual ability to repay.
The department has previously taken actions against other platforms that offered crypto interest accounts, including
