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California regulators have ordered Nexo Capital Inc. to cease unlicensed crypto lending operations after the firm allegedly issued loans to more than 5,400 state residents without conducting basic credit checks or holding proper licenses.
The California Department of Financial Protection and Innovation (DFPI) said Nexo failed to assess borrowers’ ability to repay crypto-backed loans issued between July 2018 and November 2022, violating state consumer lending laws.
The regulator described the conduct as a violation of state lending laws designed to protect consumers from reckless credit practices.
The enforcement action underscores California’s growing scrutiny of digital asset lenders as policymakers seek to ensure that crypto-backed loans are subject to the same safeguards that govern traditional financial products.
According to the DFPI’s enforcement announcement, Nexo failed to assess key financial indicators such as income, outstanding debt, credit history, or repayment capacity before issuing loans secured by digital assets.
Regulators said the absence of underwriting policies increased the likelihood of borrower default and consumer harm.
“Lenders must follow the law and avoid making risky loans that endanger consumers — and crypto-backed loans are no exception,” said KC Mohseni, Commissioner of the California Department of Financial Protection and Innovation, emphasizing that technological innovation does not exempt firms from regulatory obligations.
Crypto-backed lending allows users to borrow cash or stablecoins by pledging assets like Bitcoin or Ethereum as collateral, often without the credit checks common in traditional finance.
While proponents argue the model expands access to liquidity, regulators have warned that inadequate safeguards can amplify losses during market volatility.
The DFPI said Nexo Capital Inc. was not licensed under the California Financing Law during the period in question, making its lending activity unlawful regardless of the collateral structure.
As part of the settlement, Nexo has been ordered to transfer all California customer assets to Nexo Financial LLC, a U.S.-based affiliate that holds the appropriate state license and is required to comply with disclosure and consumer protection rules.
Regulators said the transfer is intended to ensure continued access to customer funds while placing ongoing crypto-backed loans activity under a regulated framework.
The DFPI added that licensed entities must meet record-keeping, reporting, and consumer notice standards that were absent in Nexo Capital’s earlier operations.
The action reflects a broader regulatory effort to close gaps that have allowed crypto lenders to operate across state lines without consistent oversight, particularly during the rapid expansion of digital lending products between 2020 and 2022.
The California order follows earlier regulatory pressure on Nexo in the United States. In 2023, the firm agreed to a multistate settlement over its Earn Interest Product, which regulators said had been offered without proper securities registration.
That case ultimately led Nexo to halt new U.S. participation and later announce a full withdrawal from the American market.
Outside the U.S., Nexo has also faced scrutiny in Europe. Bulgarian authorities previously brought criminal allegations related to money laundering and unlicensed banking, though those charges were later dropped.
Nexo has since filed a multi-billion-dollar arbitration claim against the Bulgarian government, disputing the handling of the case.
Regulators say the California action is narrowly focused on consumer protection and licensing compliance, not broader allegations of fraud.
Policy experts say the enforcement sends a clear signal that crypto-backed loans will no longer sit in a regulatory gray zone, particularly in large financial markets like California.
By requiring licensing, underwriting, and fund segregation, regulators aim to prevent scenarios where consumers face sudden liquidations or losses without recourse.
Industry participants warn, however, that overly aggressive enforcement could push innovation offshore if regulatory clarity does not keep pace with evolving business models.
Still, California officials maintain that responsible innovation must coexist with baseline consumer safeguards.
As states continue to refine their approach to digital assets, the Nexo case may serve as a template for how regulators balance innovation with accountability in the rapidly evolving crypto-backed loans market.
