Nexo to pay 45 million fine to SEC

In September last year, Nexo was sued in eight US states for allegedly selling unregistered securities. 

The lawsuit, filed in New York State Supreme Court, accused Nexo of promoting and selling securities in the form of an interest-bearing virtual currency account called Earn Interest Product (EIP). 

In fact EIP promised high returns, and did not appear to be registered as investment contracts as required by state law. 

Nexo’s agreement with the SEC

After four months, Nexo agreed with the SEC on a settlement under which it agreed to pay $45 million. 

The SEC’s official release states that the company agreed to pay $45 million in penalties and cease its unregistered offering of cryptocurrency lending products. 

EIP was in fact allowing returns on deposits from interest paid by those who borrowed those funds. In such cases, the laws of many states require those providing this service to obtain explicit authorization after registering it with regulators, but Nexo had not done so. 

This resulted in the sanction and termination of the service. 

The company’s official statement says that the EIP service will be suspended only in the US, but many other countries also have similar laws. The settlement with the SEC is the result of a complaint filed in the US, while to date it does not appear that similar complaints have been filed in other major jurisdictions. 

The SEC’s comment

The Securities and Exchange Commission (SEC) alleges that EIP allowed US investors to offer their crypto assets to Nexo in exchange for a promise to earn interest in return. 

This makes EIP a security, and therefore the offering and sale of this financial product could not be exempt from registration with the SEC.

The agreement with Nexo was possible because the company voluntarily stopped offering EIP to new US investors, and stopped paying interest on new funds added to existing EIP accounts of US investors. 

Nexo in return agreed to pay the fine despite neither admitting nor denying the SEC’s allegations. 

SEC Chairman Gary Gensler commented, saying: 

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

Also interesting is what SEC Enforcement Division Director Gurbir S. Grewal added: 

“We are not concerned with the labels put on offerings, but on their economic realities. And part of that reality is that crypto assets are not exempt from the federal securities laws. If you’re offering or selling products that constitute securities under well-established laws and legal precedent, then no matter what you call those products, you’re subject to those laws and we expect compliance.”

Nexo’s response

Nexo calls this settlement with US regulators a “landmark resolution”, and says that this settlement closes all multi-year investigations into the company. 

It also adds that US federal regulators do not allege that the company has been involved in fraud or deceptive business practices, or that customers have been harmed or misled. 

In short, this is only a violation of a purely bureaucratic rule, albeit one that protects investors. 

Nexo has cooperated fully with the investigation from day one, and the settlement is the result of nearly two years of work. They even state that the company has been recognized as a pioneer, like Uber and Airbnb, and that it provides innovative solutions in a fast-paced environment. 

Co-founder Antoni Trenchev commented by saying: 

“We are content with this unified resolution which unequivocally puts an end to all speculations around Nexo’s relations to the United States. We can now focus on what we do best – build seamless financial solutions for our worldwide audience.”

He also thanked the commissioners involved in the investigation for their time, effort and dedication. 

The other co-founder, Kosta Kantchev, added:

“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 United States in a compliant manner, and the U.S. will further solidify its position as the world’s engine of innovation.”

Nexo’s future

Two important things remain to be understood. 

The first is whether really sooner or later Nexo will be able to offer similar products in the US that are duly registered. 

The second is whether this de facto ban on offering products such as EIP in the US will be extended to other countries, such as those in Europe. 

Nexo has European origins, as its founders are Bulgarian, and it probably has many customers in Europe as well. 

In the meantime, its NEXO token, whose price had fallen below $0.62 in December, has today sprung above $0.84, a gain of 30% in the past thirty days. 

The price is still 79% below the all-time high of May 2021, and 63% below that of April 2022, but it has not yet fallen below the lows of June 2022 when it touched $0.56.