Nexo Capital has agreed to pay a $500,000 fine following investigations by the California financial regulator this week. The Department of Financial Protection and Innovation (DFPI) claimed that the firm issued thousands of crypto-backed loans without holding a valid license.
According to Commissioner KC Mohseni, the California financial regulator imposed a significant fine because the platform failed to properly assess the solvency of its local clients. In this way, the firm issued thousands of loans without the required license to operate legally in the state.
Specifically, authorities discovered that at least 5,456 consumer and commercial credits were made to Californian citizens between 2018 and 2022. The lack of proper underwriting policies increased the risk of default for consumers who used these digital financial services during that period.
Likewise, it was determined that the company did not evaluate the credit history of its borrowers nor did it review essential documents about their general economic condition. Therefore, these practices were described as illegal acts that contravene the financial protection laws in force in the region.
Furthermore, this agreement requires Nexo to transfer all funds from California residents to its properly authorized local affiliate. Nexo must transfer the funds to its local licensed affiliate within a maximum period of 150 days after the official resolution.
On the other hand, the company had already faced previous penalties of 45 million dollars related to its annual yield products. Compliance with current regulations is an absolute priority to ensure that digital asset platforms operate under frameworks of total transparency and safety.
The path toward greater transparency in digital credit services
Nonetheless, this case highlights the importance of financing laws to ensure the economic stability of American households today. Financing laws guarantee the stability of households against financial products that can be misleading or poorly structured.
However, in this type of credit, the forced liquidation of digital collateral represents a high risk if the value of the asset falls suddenly. For this reason, authorities insist that virtual asset lenders must perform exhaustive risk assessments before capturing any capital from users.
On the other hand, this regulatory action reflects a growing trend towards more rigorous supervision of fintech companies. Companies must adapt their models to current standards of banking supervision to avoid severe economic penalties in the near future.
Also, legal certainty is a determining factor for growth of the digital asset market at a global and national level. Since investors look for platforms that offer solid legal guarantees at the time of depositing their funds or requesting credits.
Will this penalty be the start of stricter supervision in the country?
Therefore, the resolution of this conflict marks a milestone in the supervision of cryptocurrencies platforms that operate without the corresponding permits. Nexo must implement deep operational changes in its structure to align with the requirements of the California Financing Law.
Likewise, continuous monitoring by authorities will ensure legal transparency of all lending operations carried out within the state territory. In this way, the goal is to create a much more responsible and secure financial environment for the retail user.
Finally, analysts’ eyes remain on the transition of funds to the Nexo Financial LLC entity. The transition to a regulated affiliate is a necessary step for the company to continue offering financial services in the United States. So, a greater professionalization of digital financial services is expected as regulators toughen their stance against unauthorized operations. Undoubtedly, this agreement will serve as a clear warning for other sector actors that ignore local licensing requirements.
