Why California’s $500k Nexo Penalty Signals a New Era of State-Level Enforcement

The California Department of Financial Protection and Innovation (DFPI) has penalized Nexo Capital Inc. $500,000 for violating California financial laws. Nexo offers crypto-backed loans and services.

“Lenders must follow the law and avoid making risky loans that endanger consumers — and crypto-backed loans are no exception,” said DFPI Commissioner KC Mohseni in a press release. “DFPI will continue to hold companies accountable when they break the law and put consumers’ financial security at risk.”

According to the DFPI, an examination of Nexo revealed the company offered commercial and consumer loans to at least 5,456 California residents without assessing their ability to make repayments on these loans or if they had valid licenses.

For instance before approving loans, Nexo did not check a borrower’s existing debt, credit history, or their ability to make timely payments. This lack of thorough underwriting on the part of Nexo increases the risk of borrowers falling behind and defaulting on loans. It is also a violation under California Financing Law.

Other Nexo Violations

In addition to a lack of underwriting on loans, Nexo reportedly engaged in unlawful acts and practices in relation to a consumer financial product or service. The company also offered or provided California consumers with a financial product or service that did not conform with consumer financial law, according to DFPI.

This is not the first action DFPI has taken against Nexo. In a separate action in 2022, the DFPI co-led a North American Securities Administrators Association task force to investigate Nexo’s crypto interest-earning program. 

This investigation led to a $22.5 million multistate settlement with Nexo on behalf of more than 50 U.S. jurisdictions for violation of state securities laws.

Nexo’s Response to the $500,000 Penalty

Here’s what a spokesperson from Nexo had to say about the $500,000 penalty from the California DFPI. This is her full statement.

“The matter you are referencing relates to legacy issues from an earlier phase of the business in 2022 and was resolved through a settlement with the relevant regulatory authority. After resolving this, Nexo is keeping its Californian license,” Eleonor Genova, head of communications for Nexo, told us.

The resolution addresses historical licensing and compliance matters and do not reflect the company’s current operations, governance standards, or compliance framework, Genova told us.

“Our focus remains on operating in line with regulatory expectations and building a resilient, well-governed business for our clients,” she said.

Leading the Way for Enforcement

California’s $500,000 penalty against Nexo may signal a new era of state-level consumer enforcement. With the Consumer Financial Protection Bureau seemingly defanged by the current administration, states such as California are leading the way at the state level. 

The $500,000 penalty against Nexo, an alternative lender, warns the subprime and fintech sectors that state level compliance can be both active and powerful. 

And such actions aren’t limited to California. In February, New York Governor Kathy Hochul announced a sweeping Buy Now, Pay Later framework. This is another example of a state taking the lead on consumer protections.

The Bottom Line

The California Department of Financial Protection and Innovation (DFPI) has penalized Nexo Capital Inc. $500,000 for violating its state financial laws. Nexo offers crypto-backed loans and services.

According to DFPI, Nexo is being penalized for violating California laws, including making loans to California residents without a valid license and failing to assess borrowers’ ability to repay.

A spokesperson for Nexo said the $500,000 penalty relates to legacy issues from an earlier phase of business in 2022 that was resolved through a settlement. She said Nexo maintains a “constructive, ongoing dialogue with regulators.”