California regulators have imposed a $500,000 fine on crypto lending firm Nexo Capital for issuing loans without properly assessing the borrower’s ability to repay.
Between July 26, 2018, and November 22, 2022, Nexo "offered consumer and commercial loans to at least 5,456 Californians without first considering their ability to make repayments," the California Department of Financial Protection and Innovation (DFPI) stated in a recent announcement.
Crypto-backed loans allow users to borrow fiat or stablecoins by offering crypto assets like Bitcoin or Ethereum as collateral. Due to their decentralized nature, these loans often do not undergo the credit checks or income verification processes common in traditional financial systems.
According to the DFPI, Nexo’s "lack of underwriting policies" increased the risk of borrowers defaulting on their loans.
"Lenders must follow the law and avoid making risky loans that endanger consumers — and crypto-backed loans are no exception," DFPI Commissioner KC Mohseni was quoted as saying.
Furthermore, Nexo Capital Inc. is not licensed in California to issue such loans. Consequently, the firm has been ordered to transfer all of its California customers’ funds to Nexo Financial LLC, its licensed US-based affiliate.
"Nexo Financial is required to comply with CFL licensure and disclosure requirements," the regulator added.
Nexo's Past Regulatory Issues
In 2023, Nexo Capital Inc. faced scrutiny in the U.S. after it was found to have offered its Earn Interest Product without registering it as a security. This led to a $45 million settlement. Following this, the company ceased accepting new U.S. investors for the Earn Interest Product and later announced its complete withdrawal from the U.S. market.
Globally, Nexo has encountered legal challenges. In Bulgaria, authorities initially accused the company of organized crime, money laundering, and unlicensed banking. However, these charges were later dismissed by prosecutors, and the firm subsequently initiated a $3 billion arbitration claim against the Republic of Bulgaria.