Due to a breach of California Corporations Code section 25110, the state of California, acting through the Department of Financial Protection and Innovation (DFPI), issued an urgent halt action against Nexo on September 26th, 2022.
A snapshot taken on July 31st, 2022, showed that the crypto lender had more than 18,000 ambitious Californians who had opened active accounts, according to the California Cease and Desist lawsuit.
Earn Interest Product Flex and Fixed-Term accounts were the two types of accounts that Nexo offered. The interest-bearing cryptocurrency accounts held more than $170 million in investment capital as of the snapshot taken at the end of July.
The annualized interest rate of 36% promised by the interest-bearing cryptocurrency accounts allowed users to deposit their digital assets, which is absurdly higher than the interest rates earned on conventional, regulated financial institutions like banks, investment grades, and fixed-income securities. The DFPI concluded that Nexo, a cryptocurrency lender, provided dangerous investment services without first classifying the interest-bearing accounts as securities.
The lender would be required by U.S. law to make sure prospective investors receive all the information they require (including risks involved and the use of the investor-raised funds taken by the provider) to make an informed decision regarding whether to proceed with the investment or not if Nexo declares the accounts of the consumers as security.
The New York Attorney General, Letita James, announced a lawsuit against Nexo cryptocurrency lender in a separate statement almost immediately. The lawyer in the case described how Nexo had broken New York’s Martin Act Executive Law. Letita claimed that by providing services as an unlicensed broker and dealer, Nexo was engaging in criminal activity.
To entice investors into depositing their cryptocurrency with them, Nexo allegedly made a misleading representation to the uninformed investors that it had the required license and registration certificates. According to James, the lender needs to take the necessary actions to abide by American law and safeguard its interests.