The crypto lending platform Nexo has been ordered by several California securities regulators to halt its crypto yield product.
The state claims that the company’s interest-bearing accounts qualify as unregistered securities that require proper disclosures and legal protections.
- The enforcement action was announced by the California Department of Financial Protection and Innovation (DFPI) on Monday. The Department said its action was part of a larger investigation of companies offering crypto interest accounts.”
“The DFPI has undertaken aggressive enforcement efforts against unregistered interest-bearing cryptocurrency accounts,” said DFPI Commissioner Clothilde Hewlett. “These crypto interest accounts are securities and are subject to investor protections under the law, including adequate disclosure of the risk involved.”
- As the department notes, the order follows similar DFPI action against BlockFi, Voyager, and Celsius. BlockFi accepted a $250 million credit facility from FTX during market turbulence in June, while Celsius and Voyager filed for bankruptcy.
- The DFPI determined that Nexo Earn Interest accounts were not properly qualified as securities. Such accounts allow depositors to earn a fixed crypto-denominated yield, sometimes up to 36% APY.
- Yield is typically generated through trading the volatility of the crypto market using depositors’ money. However, poorly timed trades and a down market can lead to institutions quickly going insolvent.
- The department said that such rates “are significantly higher than rates for short-term, investment-grade, fixed-income securities or bank savings accounts.”
- Securities and Exchange Commission (SEC) Chairman Gary Gensler has noted the same, warning investors about crypto accounts offering over 4.5% yield.
- Last September, the SEC forced Coinbase to suspend its lending product offering to investors days before its launch. CEO Brian Armstrong strongly disagreed with the SEC’s evaluation of the product as involving securities but acquiesced to the commission’s demands.