Crypto lending firm Nexo Capital has agreed to pay a $500,000 penalty to California’s financial regulator following allegations that it issued thousands of loans to state residents without properly assessing borrowers’ ability to repay.
The California Department of Financial Protection and Innovation (DFPI) said on Wednesday that Nexo extended at least 5,456 consumer and commercial loans to Californians without holding the required license.
According to the regulator, Nexo generally failed to evaluate key factors before issuing loans, including borrowers’ repayment capacity, existing debts, credit history, and other indicators of overall financial health.
DFPI Commissioner KC Mohseni said lenders “must follow the law and avoid making risky loans that endanger consumers — and crypto-backed loans are no exception.”
The DFPI added that Nexo’s lending practices increased the risk of default. Crypto-backed loans allow users to borrow fiat currency or stablecoins by posting digital assets as collateral. While these loans are typically overcollateralized and easier to obtain than traditional credit — often without credit checks — missed repayments can lead to the forced liquidation of collateral to cover outstanding balances.
The DFPI said Nexo lacked adequate underwriting policies, a shortcoming that increased the likelihood of borrowers defaulting on their loans.
According to the regulator, the loans were issued between July 2018 and November 2022 and involved “unlawful acts and practices” tied to a consumer financial product or service that did not comply with applicable consumer protection laws.
Under the settlement, Nexo must transfer all funds belonging to California residents within 150 days to Nexo Financial LLC, a U.S.-based affiliate that holds a California Finance Lenders License issued by the DFPI.
In February 2023, Nexo announced it would discontinue its yield-bearing Earn Interest product for U.S. customers, about a month after agreeing to pay $45 million in penalties to U.S. regulators. The program allowed users to earn daily compounding yields on certain cryptocurrencies by lending them to the company.
