California Regulators Fine Nexo Capital $500,000 for Risky Crypto Loans
California’s financial watchdog, the Department of Financial Protection and Innovation (DFPI), has imposed a $500,000 penalty on the cryptocurrency platform Nexo Capital. The Cayman Islands-based corporation was found to have issued thousands of loans to California residents without a valid license.
The DFPI made its announcement on Wednesday following an investigation that revealed Nexo had originated 5,456 loans between July 2018 and November 2022 without a valid California financing law license. Nexo has not yet issued a response to the charges.
Nexo’s Crypto Credit Lines and Absence of Credit Checks
Founded in 2018, Nexo offers a range of crypto-related financial services. Most notably, it provides crypto credit lines that enable customers to borrow fiat currency or stablecoins by using their digital assets as collateral.
The DFPI’s investigation found that Nexo did not assess a borrower’s credit history, debt, expenses, or overall financial condition before approving loans. Instead, the company touted the absence of these checks as a selling point, stating on its website: “With Nexo, there are no credit checks, and nothing is reported to credit agencies.”
However, this practice is contrary to California law, which requires lenders to evaluate a borrower’s ability to repay a loan. “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.
Nexo’s Overcollateralization Policy and Settlement Terms
Instead of assessing creditworthiness, Nexo required borrowers to overcollateralize their loans, allowing the company to liquidate a customer’s crypto assets if the loan-to-value ratio reached 83.33%.
As part of the settlement, Nexo must transfer all funds belonging to California residents to Nexo Financial, a U.S.-based affiliate with a valid financing license in the state, within 150 days. Additionally, Nexo is required to implement IP-based geoblocking to prevent new California residents from accessing its unlicensed services.
Nexo’s Regulatory History and Partnership with Mastercard
Although 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. Notably, they also maintain a partnership with Mastercard for their crypto-backed card.
Nexo works with DiPocket, a Lithuanian financial institution regulated by the Bank of Lithuania, for banking functions. DiPocket holds customer funds in segregated accounts at the Bank of Lithuania and other banks operating within the European Economic Area.
Nexo’s Past Legal Scrutinies and the Implications for Fintech
Earlier in January 2023, Nexo agreed to pay $45 million in penalties to the Securities and Exchange Commission and state regulators for failing to register the sale of an interest-earning product it offered, which the SEC considered a security. Following these charges, Nexo announced it would phase out all products and services in the United States, only to reenter the U.S. market in April.
For traditional banking institutions, the Nexo case underscores the ongoing regulatory efforts to establish a level playing field between established financial institutions and emerging fintech competitors. The DFPI asserts that crypto entities must comply with the same consumer protection laws as other lenders operating in the state, 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. This is evidenced by the department’s previous actions against other platforms offering crypto interest accounts, including BlockFi Lending, Celsius Network, and Voyager Digital, all of which have since filed for Chapter 11 bankruptcy.
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