California and New York have joined six other US state securities regulators by bringing actions against Nexo Group over the crypto lender’s interest-bearing cryptocurrency accounts.
The regulators deem the accounts to be unregistered securities offerings.
The company’s Earn Interest Product (EIP) accounts allow investors to deposit crypto assets with Nexo and in exchange earn interest on those deposits.
“These crypto interest accounts are securities and are subject to investor protections under the law, including adequate disclosure of the risk involved,” said Clothilde Hewlett, commissioner of California’s Department of Financial Protection & Innovation (DFPI), in a press release.
Switzerland-based Nexo Group’s holding company is Nexo Inc., a Cayman Islands corporation formed in 2018.
In the US, Nexo acts primarily through its Cayman-registered subsidiary Nexo Capital Inc, which owns and operates Nexo’s public website and mobile smartphone application.
According to the California state regulator Nexo advertised the accounts as ‘high yield’, offering annual interest rates as high as 36%.
The DFPI said it determined that Nexo offered its EIP accounts to California residents without first qualifying these accounts as securities.
The department said the purpose of securities registration is to ensure that investors receive all material information needed to evaluate whether to open crypto interest accounts, such as the risks the provider is taking with the deposited funds.
New York attorney general: ‘Nexo misled investors’
The New York action accuses Nexo of misleading investors about its registration status.
“Cryptocurrency platforms are not exceptional; they must register to operate just like other investment platforms,” said Attorney General Letitia James. “Nexo violated the law and investors’ trust by falsely claiming that it is a licensed and registered platform.”
The lawsuit, filed in New York County State Supreme Court, alleges that Nexo promoted and sold securities in the form of an interest-bearing virtual currency account without having registered as a securities broker or dealer.
In addition, Nexo allegedly engaged in the unregistered purchase and sale of securities and commodities through its virtual currency trading platform called the Nexo Exchange, and misled investors by falsely representing that it was in compliance with applicable laws and regulations.
Roughly 10,000 New Yorkers have accounts with Nexo, the attorney general said, while the California regulator claimed that 18,000 residents in its state had US$175 million in accounts with the company.
The other US states that have brought similar actions against the company are Washington, Maryland, Kentucky, Oklahoma, South Carolina and Vermont.
Nexo acquires stake in bank
Nexo founder and managing partner Antoni Trenchev has in past interviews welcomed regulation and consumer protection saying that through regulation large-scale adoption of crypto products can be achieved. He has also stated his belief that decentralised finance (DeFi) and centralised finance are going to merge.
In that vein, the company announced that it had acquired a stake in Hulett Bancorp, the bank holding company that owns Summit National Bank.
The deal with Summit, which is reinventing itself as a fintech bank with Nexo as its digital assets partner, would boost the company’s US presence.
“Nexo’s long-term plans include the expansion of its global commercial banking capabilities, both through the partnership with Summit National Bank and by securing additional banking licenses on a global scale,” the company said.
Regulators target all crypto lenders
US regulators have targeted crypto lenders that offer consumers interest-bearing crypto accounts, including BlockFi, Voyager Digital and Celsius Networks.
In February, BlockFi settled with US Securities and Exchange Commission (SEC) over a failure to register its crypto lending product offers and sales by paying it $50 million, with an additional $50 million penalty to 32 states. The company subsequently ceased offering its BlockFi interest accounts to US investors.
Celsius limited its ‘Earn’ products only to accredited US investors, before it filed for bankruptcy in July. The crypto lender was hit by the collapse of stablecoin Terra/Luna in May and the wider deterioration of crypto asset values since November 2021.
Voyager Digital also filed for Chapter 11 bankruptcy protection after crypto fund Three Arrows defaulted on a $650 million loan Voyager had provided.
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