The California Department of Financial Protection and Innovation (DFPI) has reached a settlement with crypto lender Nexo Capital, resulting in a $500,000 fine. The penalty addresses allegations that the company issued thousands of loans to state residents without a proper license or adequate financial vetting of its customers.
Key Allegations from the Regulator
According to the DFPI, Nexo bypassed essential consumer protection protocols between July 2018 and November 2022. Specifically:
- Unlicensed Activity: Nexo allegedly facilitated 5,456 loans (both consumer and commercial) to Californians without possessing a valid California Finance Lenders License.
- Missing Underwriting: The regulator claimed Nexo failed to evaluate basic financial markers, such as a borrower’s existing debt, credit history, or overall ability to repay.
- Increased Risk: Commissioner KC Mohseni emphasized that crypto-backed loans are not exempt from the law, noting that a lack of underwriting policies significantly heightens the danger of borrower default.
The Mechanics of the Risk
In a typical crypto-backed loan, a borrower provides digital assets as collateral to receive fiat currency or stablecoins. While these loans are often overcollateralized, the DFPI pointed out that the absence of credit checks creates a precarious situation: if a borrower cannot manage the debt, the lender is forced to sell the collateral, potentially causing financial harm to the consumer during market volatility.
Corrective Actions
As part of the agreement, Nexo must reorganize its California operations to ensure compliance:
- Fund Migration: Within 150 days, Nexo must move all assets belonging to California residents to Nexo Financial LLC.
- Licensed Oversight: Unlike the parent company, this affiliate holds the necessary California Finance Lenders License, bringing the accounts under the direct oversight of the DFPI.
