Regulatory Risk in Crypto Lending: Enforcement Actions Against Nexo Signal the Need for Investor Due Diligence and Structural Caution

The crypto lending sector, once hailed as a disruptive force in decentralized finance, has come under intense regulatory scrutiny in recent years. Enforcement actions against unlicensed platforms like Nexo Capital Inc. underscore a critical lesson for investors: the absence of robust regulatory compliance and structural safeguards in crypto lending exposes both platforms and their users to significant risks. As regulators such as the California Department of Financial Protection and Innovation (DFPI) and the U.S. Securities and Exchange Commission (SEC) intensify their oversight, the onus on investors to conduct due diligence has never been greater.

Nexo's Enforcement Actions: A Case Study in Regulatory Gaps

In 2025, the DFPI imposed a $500,000 penalty on Nexo for offering unlicensed crypto-backed loans to California residents between 2018 and 2022. The regulator found that Nexo failed to assess borrowers' creditworthiness or repayment capacity, instead relying on overcollateralization and automated liquidation mechanisms when loan-to-value ratios fell below 83.33%.

This enforcement action followed a 2023 multistate settlement in which Nexo agreed to pay $22.5 million to the SEC and $24 million to state regulators for similar violations, including its unregistered Earn Interest Product (EIP) program.

The SEC's 2023 settlement highlighted a structural flaw in Nexo's operations: its EIP allowed investors to lend crypto assets in exchange for interest, but the product was classified as a security under federal law. By failing to register the offering, Nexo exposed investors to risks without the protections afforded by securities regulations. These cases illustrate how unlicensed platforms can exploit regulatory ambiguities, leaving investors vulnerable to opaque practices and potential losses.

Regulatory Guidance: A Blueprint for Structural Caution

Regulators have increasingly emphasized the need for structural caution in crypto lending. The SEC's Crypto Task Force has clarified that activities like protocol staking on proof-of-stake (PoS) networks do not constitute securities offerings, but it has also stressed that platforms engaging in traditional lending or investment products must comply with securities laws. According to SEC guidance, platforms must adhere to existing legal frameworks. Meanwhile, the DFPI's enforcement actions against Nexo reflect a broader push to align crypto lending with consumer protection standards. Commissioner KC Mohseni explicitly stated that crypto-backed loans must adhere to the same underwriting and repayment criteria as traditional lending.

For investors, these developments signal a critical shift: crypto lending is no longer a regulatory gray area. Platforms must implement rigorous due diligence, including credit assessments and transparent collateral management, while investors must scrutinize custodial arrangements and operational risks. The SEC's December 2025 investor bulletin, for instance, warned of risks associated with third-party custodians, such as rehypothecation and asset pooling, which can amplify losses during market stress.

Investor Due Diligence: A Necessity, Not an Option

The enforcement actions against Nexo highlight a recurring theme: investors in crypto lending must prioritize due diligence. According to the DFPI's 2025 settlement, Nexo's unlicensed lending model allowed borrowers to access funds without proper verification, creating systemic risks if borrowers defaulted or crypto prices plummeted. Similarly, the SEC's 2023 settlement revealed that Nexo's EIP program pooled investor assets to fund operations, a practice that could leave investors exposed if the platform faced insolvency.

Investors are advised to ask critical questions: Does the platform hold valid licenses? How are assets secured, and what happens in the event of liquidation? Are interest rates and collateral ratios transparent? The SEC's guidance on self-custody further complicates the landscape, noting that while it reduces counterparty risk, it places full responsibility on investors to safeguard private keys-a task that can lead to irreversible losses if mishandled.

The Path Forward: Balancing Innovation and Compliance

While crypto lending offers attractive yields, the regulatory crackdown on unlicensed platforms like Nexo demonstrates that innovation must not come at the expense of compliance. The SEC's no-action letters and FINRA's updated guidance indicate a willingness to accommodate crypto innovation, provided platforms adhere to existing legal frameworks. For example, the SEC recently allowed a state-chartered trust company to act as a qualified crypto custodian, provided it met stringent due diligence standards.

Investors and platforms alike must recognize that regulatory scrutiny is not a barrier to growth but a necessary evolution. As the DFPI's actions against Nexo show, regulators are determined to enforce parity between crypto and traditional finance in terms of consumer protection. This means investors must treat crypto lending with the same caution they would apply to conventional financial products, while platforms must prioritize transparency, licensing, and risk management.

Conclusion

The enforcement actions against Nexo serve as a cautionary tale for the crypto lending sector. They reveal how unregulated practices can create systemic risks and erode investor trust. For investors, the takeaway is clear: due diligence is no longer optional. Understanding the regulatory landscape, scrutinizing custodial arrangements, and evaluating a platform's compliance with securities laws are essential steps to mitigate risk. As regulators continue to close loopholes, the crypto lending market will likely see a shift toward licensed, transparent operators-those who adapt will thrive, while those who ignore compliance will face the same fate as Nexo.