California fines Nexo $500K as crypto lenders face scrutiny

Crypto lending platform Nexo faces a half-million-dollar penalty from California regulators for making thousands of loans without proper licensing, throwing cold water on the company’s plans to restart operations in the United States.

The California Department of Financial Protection and Innovation slapped Nexo with a $500,000 fine after discovering the firm gave out crypto-backed loans to more than 5,456 people in the state without getting the necessary approvals first.

Regulators say the company also skipped basic steps like checking if borrowers could actually pay back the money.

What regulators found

The enforcement action targets a Cayman Islands-based part of Nexo called Nexo Capital Inc. Officials found the company handed out both personal and business loans backed by cryptocurrency between July 26, 2018, and November 22, 2022, all while operating without a valid California license.

“Lenders must follow the law and avoid making risky loans that endanger consumers—and crypto-backed loans are no exception,” said KC Mohseni, who runs the state financial department.

Regulators discovered Nexo didn’t bother looking into whether borrowers had the money to repay loans, what other debts they already owed, or what their credit looked like. These are standard checks that traditional lenders must perform before handing out money.

Beyond paying the fine, Nexo must move all California customer money to a properly licensed U.S. partner company within the next 150 days.

The punishment comes at a bad time for Nexo. The corporation has been indicating that it wants to return to the American market, but this action raises concerns about whether existing problems will continue to hinder that effort.

Although the punishment is for previous actions, it comes at a time when digital currency startups are questioning whether regulators are softening their stance.

California carries significant weight in these areas. It is the country’s largest state in terms of population and economic activity, making it an important market for any company that provides consumer financial services. What happens in California often foreshadows how things will unfold nationally.

During the time period regulators examined, Nexo grew its crypto-backed lending business substantially before eventually pulling out of the U.S. market altogether. The company left as state and federal officials increased their scrutiny of how it operated.

Questions about Nexo’s future

These days, Nexo no longer offers its traditional crypto lending products to American customers. It only provides crypto-backed borrowing services to people outside the United States, a change that came after multiple run-ins with regulators.

Kadan Stadelmann, who works as Chief Technology Officer at Komodo Platform, said the findings should worry people. “The fact that Nexo failed basic ability-to-repay checks for thousands undoubtedly raises red flags about systemic compliance shortfalls, and consumers should heed these warnings,” he noted.

Stadelmann pointed out that California’s rules focus heavily on making sure loans are backed by enough collateral to protect people from defaults. The state also has strong borrower protections designed to prevent a repeat of the 2008 financial meltdown, but in the crypto world.

He also mentioned that Nexo’s settlement approach, where companies do not admit or deny wrongdoing, helps firms avoid problems like shareholder lawsuits or getting blocked from obtaining future licenses. However, he warned the company “could face further admissions, increasing fines, or regulatory monitors” as officials continue examining its track record.

“Other crypto companies have faced similar regulatory penalties, including the likes of FTX and Binance, and remain in business. Why not Nexo?” Stadelmann asked.

The California action adds to Nexo’s growing list of regulatory headaches in America and raises fresh questions about whether firms with checkered compliance histories can make a comeback, even if the political winds seem to be shifting in crypto’s favor.

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