On Monday, eight states declared initiatives against the cryptocurrency-lending system Nexo Group in correlation with its unauthorized, interest-bearing virtual currency offering.
Nexo is accused by state authorities in Oklahoma, California, Washington, New York, Vermont, Kentucky, Maryland, and South Carolina of offering consumers interest-earning profiles before even trying to register them as assets and giving appropriate disclosures. State authorities argue that without access to these accounting records, stakeholders cannot make well-informed investment choices.
According to the documents filed, Nexo misstated the account balances and issued a statement saying that it is a registered and licensed system. Based on one of the submissions, these interest-earning profiles, known as Earn Interest Product, allowed customers to store investments with Nexo in compensation for generating returns as steep as 35% on their investments.
Nexo, on the other hand, claims that just one investment earns a 35% rate of interest and does not promote that return in its promotional material. According to the organization, some of its most prevalent assets, such as Bitcoin, only generate single-digit percentage returns.
The clampdown comes as several recent virtual currency insolvencies have left stakeholders without access to their cash this year. After blocking customer money in June, Celsius, which provided similar interest-bearing accounts, declared bankruptcy this summer. In July, a third company, Voyager, made a Chapter 11 bankruptcy filing. During the weeks following the total collapse of virtual currency Terra USD and the malfunction of blockchain hedge fund Three Arrows Capital, the sector saw billions of dollars obliterated.
Nexo’s conditions of service stated that the company could implement customer assets at its absolute and sole discretion.
As stipulated in the Vermont order, stockholders have no say in choosing, reviewing, or assessing the revenue-generating operations used by Respondents to obtain this interest.
According to the submitted order, more than 93,318 US citizens had started investing upwards of $800 million in these profiles as of July 2022.
In response to the impact on over 10,000 of its inhabitants, Attorney General of New York Letitia James brought a lawsuit against the digital currencies system.
Virtual currency frameworks are not unique; they must register to operate, which is the same as other investment platforms, according to James. Nexo broke the law and betrayed stakeholders’ trust by fraudulently claiming to be a registered and licensed framework. Nexo must halt its illegal operations and take the necessary steps to safeguard its investors.
In February, the crypto-lending framework barred US depositors who had yet to open a Nexo profile from making an investment in the Earn Interest Product or incorporating more virtual currency into their profiles. The state orders also inhibit Nexo from trying to offer this commodity to inhabitants until it fulfills the state regulations.
Nexo sought to distinguish itself from other systems that have experienced financial difficulties this year, according to a statement.
They have been continuing to work with state and federal regulatory authorities in the United States and fully comprehend their desire, given the current economic chaos and insolvencies of businesses that provide similar products, to satisfy their demands of shareholder protection by analyzing previous actions of suppliers of earn interest products, according to a statement from the organization.
As recent times have indicated, Nexo is a unique provider of earn interest products, as evidenced by the fact that it did not partake in uncollateralized lines of credit, had no attention to LUNA/UST, was not bailed out, and did not require any drawdown constraints.
What This Means for The Industry
As more organizations with similar business models emerge, it is extremely likely that we may see things like this happening more often. Although annoying for companies, these regulations are crucial for protecting consumers looking to make use of these investment services. Too many companies involved in cryptocurrency-related lending have ended up costing investors millions of Dollars with barely any repercussions.
Although there is always some risk when investing money (especially in assets such as cryptocurrency), platforms that use investors’ money to earn interest should be taking all the necessary precautions relating to risk management.
The Bottom Line
A lack of due diligence can end up costing both companies and investors a ton of money. This type of legal crackdown seeks to ensure the safety of all parties involved.
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