California’s Desist and Refrain Order Against Nexo: What You Need to Know

What Happened?

The California Department of Financial Protection & Innovation (DFPI) has decided to shake things up by filing a desist and refrain order against the crypto lending platform Nexo. This comes as part of a larger investigation into various companies offering interest-bearing crypto asset accounts. Nexo isn’t alone in the spotlight; regulators from seven other states—Kentucky, New York, Maryland, Oklahoma, South Carolina, Washington, and Vermont—are in on the action too.

Nexo’s Earn Interest: A Not-So-Great Investment?

According to the DFPI, Nexo’s Earn Interest Product was anything but qualified. Described as an unqualified security, this product had quite an attractive deal—up to 36% interest annually! However, it appears that glitzy offers can come with a hefty dose of regulatory scrutiny. The DFPI clearly stated that no one puts the ‘investment’ in ‘investment contract’ here without government approval.

The Consequences for Nexo and Customers

Since February 19, Nexo has been on the no-fly list for new users in the U.S., and existing account holders can’t make new deposits. This restriction ramped up following BlockFi’s $100 million penalty for similar issues, sending a loud message throughout the crypto lending space. Interestingly, accounts that had automatic renewal still continued garnering interest payments, leaving many to scratch their heads and wonder what exactly that means for Nexo’s financial practices.

What Other Regulators Are Saying

DFPI Commissioner Clothilde Hewlett didn’t mince words when addressing the matter. “These crypto interest accounts are securities and are subject to investor protections under the law,” she stated, emphasizing the necessity for proper risk disclosures. So, essentially, buyers beware—isn’t that how the saying goes?

Nexo’s Response: Defiant but Cooperative

In a bid to keep things chill, Nexo reached out to Cointelegraph, saying, “We have been working with U.S. federal and state regulators,” showcasing their willingness to comply. They pointed out that they’re not your typical crypto lender, highlighting their stark contrasts with notorious players in the market that spiraled into chaos. No uncollateralized loans, no exposure to a certain Terra (LUNA) debacle, and certainly no bailouts to speak of—yet, they’re still facing scrutiny like the rest of the gang.

Regulatory Trends: More to Come?

Looking at the bigger picture, the DFPI’s activities aren’t isolated events. For example, a consent order against Celsius Network revealed their CEO’s alleged misrepresentations about crypto interest accounts. Meanwhile, Voyager Digital also faced a similar crackdown right before its bankruptcy. And let’s not forget Governor Gavin Newsom’s recent veto of a bill intended to provide a regulatory framework for digital assets; guess he feels it’s all a bit “too soon.”