This is a bad start
Nexo, a cryptocurrency lending firm, has not had a happy beginning for the new year. Bulgarian authorities have accused the company of allowing customers to use its platform for illegal activities such as money laundering, tax offenses, and financing terrorist activities – accusations that Nexo denies. To add to the company’s woes, the Securities and Exchange Commission (SEC) has charged the firm with selling unregistered securities, stating that the company failed to register with the SEC before offering its crypto lending product, “Earn Interest.”
The SEC’s enforcement action is a clear indication that crypto assets are not exempt from federal securities laws and that companies offering products that constitute securities must comply with these laws. In settling with the SEC, Nexo has agreed to cease offering the interest program and pay a $22.5 million penalty, as well as an additional $22.5 million to settle with state regulators.
SEC Charges
The SEC’s charges stem from Nexo’s failure to register its “Earn Interest” product before offering it to the public, bypassing essential disclosure requirements designed to protect investors. SEC Chair, Gary Gensler, stated that “compliance with our time-tested public policies isn’t a choice.” He went on to say that where crypto companies do not comply, the SEC will continue to follow the facts and the law to hold them accountable.
Nexo launched in 2018 as a British digital asset platform that loans out client funds and uses the proceeds to pay interest. In June 2020, the company began offering its “Earn Interest” product. However, by September 2022, several U.S. states, including California, Vermont, Oklahoma, South Carolina, Kentucky, and Maryland, had filed cease-and-desist orders against the company, calling the Nexo “Earn Interest” product an unregistered security.
Nexo has reached a final landmark resolution with the U.S. Securities and Exchange Commission (SEC), the North American Securities Administrators Association (NASAA), consisting of all 50 U.S. States & 3 territories and the Attorney General of New York.🧵https://t.co/modjbPsOdV
— Nexo (@Nexo) January 19, 2023
Nexo wants to comply
In an effort to comply with regulators, Nexo announced in September 2022 that it was taking a stake in U.S. federally chartered bank, Summit National Bank, based in Wyoming. Despite this move, the company announced in December 2022 that it would be winding down its U.S. operations after hitting a “dead end” with regulators.
Not an Isolated Incident
The SEC’s enforcement action against Nexo is not an isolated incident. In 2022, the SEC brought a record number of crypto-related enforcement actions, up 50% compared to 2021, according to a report by consulting firm, PwC. Nearly half of these actions were against initial coin offerings (ICOs).
The increased enforcement efforts by global regulators come in the wake of the collapse of several crypto firms, including Celsius and FTX. The SEC’s action against Nexo serves as a reminder that companies operating in the crypto space must comply with federal securities laws and that failure to do so can result in significant penalties.
It remains to be seen how the collapse of Nexo’s “Earn Interest” product and the company’s decision to wind down its U.S. operations will impact the broader crypto lending market. However, the SEC’s enforcement action sends a clear message to other companies operating in this space that they must comply with federal securities laws or risk facing similar penalties.
