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 (EIP), which allowed customers to lend certain digital assets in interest-bearing accounts. In a proceeding before the U.S. Consumer Financial Protection Bureau, Nexo argued in response to a civil investigative demand that the Bureau lacked jurisdiction because the Securities and Exchange Commission (“SEC”) and state securities regulators had asserted jurisdiction over interest-bearing crypto lending products. See here. Nexo has now agreed to pay fines to those regulators — $22.5 million to the SEC and another $22.5 million to the North American Securities Administrators Association (NASAA) — for failing to register the offer and sale of its EIP.
According to the SEC’s Order, in or around June 2020, Nexo began to offer and sell the EIP in the United States. The EIP allowed U.S. investors to tender their crypto assets to Nexo in exchange for Nexo’s promise to pay interest. The order states that Nexo marketed the EIP as a means for investors to earn interest on their crypto assets, and Nexo exercised its discretion to use investors’ crypto assets in various ways to generate income for its own business and to fund interest payments to EIP investors. The order finds that the EIP is a security and that the offer and sale of the EIP did not qualify for an exemption from SEC registration. Therefore, Nexo was required to register its offer and sale of the EIP, which it failed to do.
In February 2022, the SEC had reached a $100 million settlement with BlockFi concerning a similar product. The Order states that, in the wake of this settlement, Nexo voluntarily ceased offering the EIP to new U.S. investors and ceased paying interest on new funds added to existing EIP accounts of U.S. investors. Further, the Order states that Nexo announced in December that it was ceasing the EIP in certain states and phasing out all of its products and services in the United States, including permanently ceasing to offer the EIP to all U.S. investors.
Nexo agreed to pay the fines without admitting or denying the SEC’s findings. It also agreed to a cease-and-desist order prohibiting it from violating the registration provisions of the Securities Act of 1933.