California Fines Crypto Asset Manager Nexo $500,000 for Operating Unlicensed Lending

California regulators have imposed a $500,000 fine on cryptocurrency lender Nexo for offering unlicensed loans to thousands of state residents. The California Department of Financial Protection and Innovation (DFPI) stated that Nexo Capital Inc., a Cayman Islands-based subsidiary of the firm, issued crypto-backed consumer and commercial loans without a valid license or proper borrower evaluation.

The DFPI investigation found that Nexo failed to assess borrowers' ability to repay, their existing debt, or credit history before extending credit. This practice increased the risk of default and violated California financial regulations.

As part of the settlement, Nexo must transfer all funds of California residents to a U.S.-based licensed affiliate, Nexo Financial LLC, within 150 days. This entity holds a valid DFPI license and is required to comply with state financial regulations.

Why Did This Happen?

The unlicensed lending period spanned from July 2018 to November 2022, during which Nexo expanded its crypto-backed lending services in the U.S. The DFPI cited a lack of underwriting policies, meaning the firm did not perform standard financial checks on borrowers before issuing loans.

This regulatory action follows a broader pattern of scrutiny against Nexo. In 2023, the company agreed to pay $45 million in penalties to the U.S. Securities and Exchange Commission (SEC) and other state regulators for unregistered lending and yield products.

What Are Analysts Watching?

Industry experts note that this case reflects the increasing regulatory focus on crypto lending compliance. Kadan Stadelmann of Komodo Platform emphasized that California's framework leans toward overcollateralization and borrower protections to avoid risks similar to the 2008 financial crisis.

Stadelmann also pointed out that Nexo's reliance on no-admit-no-deny settlements could lead to further regulatory consequences, including increased fines or the appointment of monitors to ensure compliance.

What Comes Next for Nexo?

Nexo has suspended traditional crypto lending products for U.S. customers and now offers crypto-backed borrowing services abroad. This latest fine adds to a history of regulatory issues, including a $22.5 million multistate settlement in 2022 over its interest-earning product.

The company has yet to publicly comment on the California fine but must now comply with the DFPI's 150-day transfer requirement. The outcome of this settlement may influence future regulatory interactions, particularly as Nexo aims to re-enter the U.S. market.

Nexo's situation highlights the growing importance of regulatory compliance in the crypto lending sector. With increasing scrutiny from state and federal authorities, platforms must ensure adherence to financial laws and consumer protection standards to avoid penalties and maintain market credibility.