The US Securities and Exchange Commission has charged Nexo Capital Inc. with failing to register the offer and sale of its retail crypto asset lending product, the Earn Interest Product (EIP).
Earlier this month, Nexo sued the Cayman Islands Monetary Authority for refusing its application to be registered as a virtual asset services provider on island.
In a letter to Nexo, the regulator said its business model did not fit Cayman’s risk profile, and that Nexo posed a risk to market confidence, consumer protection and the reputation of the islands as a financial centre.
CIMA further noted the crypto lender had not updated its application with information on US and UK court cases and actions by several US state regulators that it was subject to.
To settle the SEC’s charges, Nexo agreed to pay a $22.5 million penalty and cease its unregistered offer and sale of the EIP to US investors.
In parallel actions, Nexo further agreed to pay another $22.5 million in fines to settle similar charges by state regulatory authorities.
According to the SEC, Nexo’s product from June 2020 allowed investors to earn interest on their crypto assets, while Nexo exercised its discretion to use investors’ crypto assets in various ways to generate income for its own business and to fund interest payments to EIP investors.
The SEC found that EIP is a security and that the offer and sale of the EIP did not qualify for an exemption from SEC registration.
As a result, Nexo was required to register its offer and sale of the EIP, which it did not do.
The commission said it agreed to the settlement because the company had promptly undertaken remedial acts and cooperated with the regulator.
For instance, after the SEC announced charges against BlockFi, involving a similar crypto investment product, Nexo voluntarily ceased offering the EIP to new US investors and ceased paying interest on new funds added to existing EIP accounts of US investors.
In addition, Nexo announced in December that it was ceasing the EIP in certain states and phasing out all of its products and services in the US, including permanently ceasing to offer the EIP to all US investors.
“We charged Nexo with failing to register its retail crypto lending product before offering it to the public, bypassing essential disclosure requirements designed to protect investors,” said SEC chair Gary Gensler in a press release.
“Compliance with our time-tested public policies isn’t a choice. Where crypto companies do not comply, we will continue to follow the facts and the law to hold them accountable. In this case, among other actions, Nexo is ceasing its unregistered lending product as to all U.S. investors.”
Gurbir S. Grewal, director of the SEC’s enforcement division, added, “We are not concerned with the labels put on offerings, but on their economic realities. And part of that reality is that crypto assets are not exempt from the federal securities laws.”
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