US CFPB Rejects Argument That It Lacks Authority Over Interest-Bearing Crypto Lending Products

Nexo Financial LLC is a company that describes itself as a leading cryptocurrency institution offering a number of digital assets services through its website.  It offered its customers, among other things, an Earn Interest Product, which allowed customers to lend certain digital assets in interest-bearing accounts.

On December 1, 2021, the Consumer Financial Protection Bureau (“Bureau”) served Nexo with a civil investigative demand (“CID”)  requiring that a representative of the company appear by videoconference for oral testimony at an investigational hearing.  The Bureau was investigating a number of Nexo’s products, including the Earn Interest Product.  After a number of meetings between the Bureau and Nexo, which did not result  in any agreement, Nexo moved to modify the CID to exclude the Earn Interest Product on the ground that the Bureau lacked authority over that product.

Nexo argued that the Securities and Exchange Commission (“SEC”) and state securities regulators had asserted jurisdiction over interest-bearing crypto lending products.  More specifically, Nexo referred to the SEC’s February 14, 2022 Order against BlockFi Lending LLC.  According to Nexo: “The BlockFi Order resolved any doubt as to whether the SEC views interest-bearing accounts on crypto lending platforms as securities and prompted Nexo to take immediate action with respect to its Earn Interest Product. Specifically, in light of the announcement of the BlockFi Order, Nexo ceased offering the Earn Interest Product to new U.S. clients and began working to implement other changes by which current users would no longer earn interest on new funds in their Earn Interest Product accounts.”

The CFPB denied Nexo’s petition.  It’s primary reason was that Nexo was effectively trying to have its cake and it eat too.  That is, although Nexo sought to rely on the SEC’s order in BlockFi, it did not contend that the SEC had determined that the Earn Interest Product is a security. Nor did Nexo concede that the Earn Interest Product is, in fact, a security, or that Nexo’s offering of the Earn Interest Product required Nexo to register with the SEC (whether as a broker, dealer, investment company, or for any other reason).  To the contrary, Nexo had written to its customers in February 2022 saying “[w]e have not filed or confidentially submitted a registration statement with the SEC for any interest-bearing products and there is no guarantee it would be declared effective.”

The Bureau rejected Nexo’s effort to avoid answering any of the Bureau’s questions about the Earn Interest Product on the theory that the product is a security subject to SEC oversight, while at the same time preserving the argument that the product is not a security subject to SEC oversight.