SEC Charges Nexo With Unregistered Securities Violations, Settles On Same Day For $45m

January 24, 2023
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Nexo, a Bulgaria-based crypto lending and trading platform, has agreed to a $45m settlement after being charged with unregistered securities violations by the US Securities and Exchange Commission (SEC).

Nexo, a Bulgaria-based crypto lending and trading platform, has agreed to a $45m settlement after being charged with unregistered securities violations by the US Securities and Exchange Commission (SEC).

Last week, the SEC announced that it had charged Nexo with failure to register its Earn Interest Product (EIP), a yield-bearing crypto-asset scheme that it offered and sold to US investors.

On the same day, the SEC announced that Nexo had agreed to settle the complaint for a total of $45m. Of the total settlement, $22.5m will go directly to the SEC in penalty fees, and $22.5m will go to state authorities to settle similar complaints.

According to the SEC, Nexo neither admitted nor denied any wrongdoing in relation to the EIP, and has agreed to comply with a cease-and-desist order preventing it from offering such products to US investors in future.

“Compliance with our time-tested public policies isn’t a choice,” said SEC chair Gary Gensler. “Where crypto companies do not comply, we will continue to follow the facts and the law to hold them accountable.

“We charged Nexo with failing to register its retail crypto lending product before offering it to the public, bypassing essential disclosure requirements designed to protect investors.”

The relevant period of the case dates back to June 2020, when Nexo began offering the EIP to US-based customers.

The EIP allowed US investors to tender their crypto-assets to Nexo in exchange for Nexo’s promise to pay interest.

While Nexo held the customers’ crypto-assets, it used them to fund its own business and to generate income to pay the interest — a practice that was permitted as per Nexo’s terms and conditions.

The SEC, therefore, determined that EIP is a security and did not qualify for an exemption from registration rules.

A speedy settlement

Regarding the apparent speed of the settlement process, the SEC said that for almost a year prior to the complaint Nexo had taken proactive steps to phase out the EIP in the US market.

This process began in February 2022 when BlockFi, a rival crypto lending platform, agreed to a $100m settlement with the SEC for similar offences involving unregistered securities.

Four days after the SEC announced its settlement with BlockFi, Nexo voluntarily ceased offering and selling the EIP to US investors, but continued to pay out interest to existing EIP customers.

In March 2022, Nexo had 440,000 EIP customers worldwide, of which 112,000 were based in the US. At the time, the total value of all assets held in the EIP worldwide was $9bn, of which $2.7bn was from the US.

Later, in December 2022, Nexo announced that it was terminating the EIP in certain states and “phasing out” all Nexo services to US-based customers.

In other words, Nexo had already complied with the terms of the SEC’s cease-and-desist order before it was issued.

Despite setback, Nexo remains upbeat

Responding to the SEC’s decision, Nexo published a statement in which described the enforcement action as a case of no-harm, no-foul.

“As innovators do not quite fit into existing provisions, constructive dialogue for the enhancement of the prevailing regulatory frameworks is of paramount importance,” said Nexo.

“It is Nexo’s belief that the company has been recognized for what it truly is - a pioneer, like Uber and Airbnb, providing disruptive solutions in a fast-paced environment.”

Kosta Kantchev, co-founder of Nexo, added that with a different regulatory framework in place in future, Nexo is likely to return to the US market.

“We are confident that a clearer regulatory landscape will emerge soon, and companies like Nexo will be able to offer value-creating products in the US in a compliant manner, and the US will further solidify its position as the world’s engine of innovation,” he said.

Other observers were not so impressed, either with Nexo’s alleged violations or the company’s response.

John Reed Stark, president of John Reed Stark Consulting and former head of the SEC’s Office of Internet Enforcement, described Nexo’s response as “spin”.

“Nexo pays a whopping $45m to the SEC but claims a victory for 'innovation'," he said. “Such absurd spin is the latest crypto-trend.”

Stark pointed out that BlockFi had used similar language in its response to the $100m settlement it agreed with the SEC last year.

“We are pleased to share that today we have reached an agreement with US federal and state regulators, outlining a clear path forward for BlockFi and for Americans to earn crypto interest,” BlockFi’s founders wrote in a joint statement.

“We have worked tirelessly with regulators on your behalf to chart this exciting path forward, and we look forward to our next chapter of pioneering innovative, crypto-powered products for our clients worldwide.”

With a year’s hindsight, BlockFi’s optimism following the settlement now seems unwise. Having filed for bankruptcy in November last year, BlockFi became the latest in a long and growing list of crypto lenders that went bust in 2022.

Nexo: next domino to fall?

As for Nexo, its optimism may turn out to be similarly misguided. This month, as reported by VIXIO, Nexo’s head office in Sofia, Bulgaria, was raided by police, and the company was accused of facilitating money laundering, tax crimes, fraud and unlicensed banking activities.

“Nexo responded in a statement posted online: “Over the years, we have turned down a lot of business because Nexo never makes compromises with regard to our very stringent anti-money laundering and know-your-customer policies.

“Unfortunately, with the recent regulatory crackdown on crypto, some regulators have adopted the kick first, ask questions later approach. In corrupt countries, it is bordering with racketeering, but that too shall pass.”

Only one month earlier, Nexo had registered as a virtual asset service provider (VASP) in Poland, following a similar registration in Italy in November 2022.

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