Crypto lending company Nexo Capital has agreed to pay a $500,000 penalty to California’s financial regulator following allegations that it issued thousands of loans to state residents without adequately assessing their repayment capabilities.
The California Department of Financial Protection and Innovation (DFPI) announced on Wednesday that Nexo originated at least 5,456 consumer and commercial loans to Californians without possessing a valid license to do so.
According to the regulator, Nexo Capital generally did not evaluate a borrower’s ability to make timely repayments, their existing debt, credit history, or other documentation pertinent to their overall financial condition before issuing a loan.
DFPI Commissioner KC Mohseni emphasized the importance of legal compliance in lending, stating, “Before making a loan, Nexo Capital generally did not evaluate the borrower’s ability to make timely repayments, existing debt, credit history, or other documents relating to the borrower’s overall financial condition.” He further added, “lenders must follow the law and avoid making risky loans that endanger consumers — and crypto-backed loans are no exception.”
DFPI Highlights Increased Risk of Default for Nexo Loans
Crypto-backed loans provide users with the ability to borrow fiat currency or stablecoins by using digital assets as collateral.
While these loans are typically overcollateralized and more accessible than traditional credit, often without requiring credit checks, failure to make repayments can result in the forced liquidation of collateral to cover outstanding balances.
The DFPI asserted that Nexo’s “lack of underwriting policies” significantly increased the risk of borrowers defaulting on their loans.
The regulator stated that these loans were issued between July 2018 and November 2022 and constituted “unlawful acts and practices” related to a consumer product or service that failed to adhere to consumer financial laws.
Nexo is required to transfer all funds belonging to California residents to Nexo Financial LLC, a US-based affiliate that holds a California Finance Lenders License with the DFPI, within 150 days.
This situation follows Nexo's announcement in February 2023 that it would cease its yield-bearing Earn Interest product for US customers. This decision came approximately one month after the company agreed to pay $45 million in penalties to US regulators.
The Earn Interest program allowed users to earn daily compounding yields on certain cryptocurrencies by lending them to Nexo.