Nexo has hit the wall.
The crypto lender, which was founded in Switzerland in 2018, said on Dec. 5 that it would be phasing out its products and services in the U.S. after negotiations with regulators came to "a dead end."
"Today we are announcing the regrettable but necessary decision that Nexo will be phasing out its products and services in the United States in a gradual and orderly fashion over the coming months," the company said on Dec. 5. "Our decision comes after more than 18 months of good-faith dialogue with US state and federal regulators which has come to a dead end."
Despite inconsistent and changing positions among state and federal regulators, Nexo said it had "engaged in significant ongoing efforts to provide requested information and to proactively modify its business in response to their concerns."
"It is now unfortunately clear to us that despite rhetoric to the contrary, the US refuses to provide a path forward for enabling blockchain businesses and we cannot give our customers confidence that regulators are focused on their best interests," Nexo said.
Regulators 'Unwilling to Coordinate'
In September, eight states--California, Kentucky, New York, Maryland, Oklahoma, South Carolina, Washington and Vermont--said they were suing the company for allegedly offering interest-earning accounts to customers through unregistered securities.
New York Attorney General Letitia James said in a Sept. 26 statement that Nexo "violated the law and investors’ trust by falsely claiming that it is a licensed and registered platform."
"As part of our cooperative approach with regulators, during the course of 2021 and 2022, we have off-boarded clients from the states of New York and Vermont and have suspended new registrations for all US clients for our Earn Interest Product to meet regulators’ expectations," Nexo's statement said.
As of December 6, Nexo said its Earn Interest Product will not be available for existing clients in eight additional US states - Indiana, Kentucky, Maryland, Oklahoma, South Carolina, Wisconsin, California, and Washington.
Nexo claimed that regulators are unwilling to coordinate with one another, "and are insistent on taking positions that are inconsistent with one another, creating an impossible environment to operate efficiently and to create the expected value for our clients."
"This was made crystal clear by the Consumer Financial Protection Bureau’s (CFPB) decision this past Thursday insisting it has jurisdiction to investigate our Earn Interest Product, which the SEC and state regulators have simultaneously insisted is a security subject to their jurisdictions," the company said.
'Ruling by Enforcement'
The CFPB declined to comment on Nexo's allegations, but cited a recent decision were the bureau denied Nexo's petition to modify the CFPB's Civil Investigative Demand.
The bureau rejected Nexo’s claim that the CFPB does not have jurisdiction to investigate crypto-lending products offered by Nexo such as its Earn Interest Product.
"As we effectuate our orderly exit from the US, Nexo’s payment specialists have been informed and will continue processing withdrawals in real-time so that customers as always have uninterrupted access to their assets," Nexo said.
Frank Corva, senior analyst for digital assets at Finder, said Nexo's actions were hardly surprising as Securities and Exchange Commission and its Chair Gary Gensler "have developed a reputation for 'ruling by enforcement' and not by providing a proper framework for crypto startups to work within."
"In other words, the SEC hasn’t provided proper guidance to crypto startups on what sorts of financial products are allowed and not allowed, and certain crypto companies have found themselves guilty of violating rules that weren’t entirely clear in the first place," he said.
Gensler has also stated that the SEC’s door is open if startups have questions, Corva added, "but few founders who’ve gone to the SEC with questions have received answers that they’ve found suitable."
"Given all of this, it’s no wonder that a platform like Nexo doesn’t want to put up with such difficulties," Corva said. "I’d imagine that no startup wants to deal with the stress of potentially facing harsh financial penalties for not abiding by the unclear rules of a regulatory framework that most have found to be quite ambiguous and open to interpretation."
'Not Liking the Message'
An SEC spokesperson said that the agency does comment not on any specific entity, but noted that Gensler spoke about similar criticism in a Sept, 8 address where he said that for the past five years "the Commission has spoken with a pretty clear voice here:"
"Not liking the message isn’t the same thing as not receiving it," Gensler said. "Crypto investors should get the protections they receive from regulated broker-dealers."
A sampling of social media comments ran mostly in favor of Nexo.
"It is not your fault that our US government is run by a bunch of 80+ year olds who have zero interest in anything but keeping the status quo," one tweet read. "Please don't give up on us!"
"The Federal government doesn't want to lose all of that sweet tax revenue that they gain when people sell their cryptoassets," another commenter said. "Borrowing against your cryptoassets results in no tax liability and it results in less US dollars for them to manipulate."
"Shitcoin and scam DeFi not welcomed. Bye," one person said.
The cryptocurrency sector has been severely battered, most recently by collapse of cryptocurrency exchange FTX. Founder and CEO Sam Bankman-Fried maintained he "didn't ever try to commit fraud on anyone."
