Nexo Capital Inc is appealing the rejection by the Cayman Islands Monetary Authority of the crypto lender’s application for a virtual asset service provider licence.
In a suit filed in the Cayman Islands Grand Court on 12 Jan., the company is seeking a reversal of the decision and a declaration that Nexo Capital is suitable to be registered under the Virtual Asset (Service Providers) Act by the financial regulator.
The Cayman company, launched in February 2018, is described in the court filing as “a non-bank financial institution” and one of the world’s largest lending companies for over-collateralised digital asset-based credit products.
In addition to high-yield ‘earn interest’ products that allow its customers to deposit digital assets in interest-yielding accounts, Nexo offers in-house, over-the-counter (OTC) and supplementary B2B services.
CIMA refused the application, originally submitted in January 2021, last month.
In a letter dated 20 Dec. 2022, the regulator said Nexo Capital’s proposed business model did not meet the required risk profile for registration.
CIMA cited the size, scope and complexity of the proposed business model and the risk Nexo poses to market confidence, consumer protection and the reputation of the islands as a financial centre.
The regulator noted deficiencies in risk assessments, as well as anti-money laundering and sanctions policies and procedures.
In addition, the directors and ultimate shareholders had failed to disclose regulatory enforcement matters in various US states and proceedings in the High Court of Justice of England & Wales.
In its letter, CIMA further said the proposed product offering could impact clients, other licensees and the financial system of the islands.
Nexo claims in its court application, published by Offshore Alert, the reasons given by CIMA were insufficient, not detailed enough and irrational. And the refusal decision, the company argues, was unreasonable or disproportionate and procedurally unfair.
Crypto credit products targeted by regulators
US regulators started to put the spotlight on crypto lending products, such as interest-bearing crypto accounts, last year.
In February 2022, BlockFi settled with the US Securities and Exchange Commission (SEC) over its failure to register its crypto lending product offers and sales by paying it US$50 million, with an additional $50 million penalty to 32 states.
Many of the targeted crypto lenders, including BlockFi, Voyager Digital and Celsius Networks, are now in liquidation, after they were caught up in the contagion of last year’s wider digital asset value decline.
Only last week, the SEC charged crypto lenders Genesis Global Capital and Gemini Trust Company for the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending programme.
The Switzerland-based Nexo Group has been subject to similar actions.
In September 2022, eight US states issued cease-and-desist orders against Nexo or brought other proceedings stating the crypto lender had failed to register its interest-bearing cryptocurrency accounts as securities offerings.
In response, the company announced its gradual departure from the United States last month, stating “more than 18 months of good-faith dialogue with US state and federal regulators” had “come to a dead end”.
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