Nexo Obtains US Bank Charter Despite Cease and Desist Orders

Sep 28, 2022

Nexo, a well-known crypto lending and investment platform, is facing intriguing times. This Monday, multiple U.S. states filed a lawsuit against the company, accusing it of offering unregistered securities. Barely a day later, it  announced the acquisition of a U.S. bank charter, and these two events seem related.

  • This week, securities regulators from eight U.S. states filed lawsuits against Nexo, asserting that its interest-bearing crypto accounts constitute securities sold without the necessary permissions and disclosures. The eight states are New York, California, Kentucky, Oklahoma, Maryland, Vermont, South Carolina, and Washington.
  • The states ordered Nexo, a company based in Switzerland, to cease offering its “Earn Interest Product” accounts to residents until it meets the necessary registration requirements. New York filed a more stringent fraud suit against Nexo, seeking disgorgement of revenues and restitution to customers.

Not long after the states brought their lawsuits to the limelight, Nexo announced that it had acquired an undisclosed stake in the parent firm of the Summit National Bank, a little-known federally chartered bank with a few branches in the U.S.

As a federally chartered bank, Summit is licensed to operate across the US by the federal government. By purchasing an undisclosed but likely majority stake in the bank, Nexo has effectively obtained a license to open bank accounts and offer lending products to customers across the U.S.

  • It’s no coincidence that Nexo bought a stake in a federally chartered bank on the cusp of being sued by multiple states for offering unregistered securities. The company’s Earn Interest product, which is being targeted by regulators, works like a typical bank account but with crypto deposits instead of fiat and no government-backed insurance.
  • By obtaining a bank charter, Nexo wants to legitimize its Earn Interest product and avoid further troubles with regulators. The company is keen on expanding in the U.S. despite facing considerable resistance. A bank charter will ease Nexo’s path to offering additional crypto loan products, potentially even crypto mortgages in the future.

Nexo isn’t the first company offering interest-earning crypto accounts to get sued by U.S. state regulators. BlockFi, a competing platform, faced similar charges and ended up paying $100 million in fines; $50mn to the U.S. Securities and Exchange Commission (SEC) and another $50mn to 32 states.

Two other well-known crypto investing platforms, Voyager Digital and Celsius, have faced similar lawsuits from regulators. However, these two platforms recently filed for bankruptcy, and the lawsuits are still in progress.

Nexo has become the third crypto firm to obtain a U.S. federal bank charter. The first two were Anchorage Digital Bank, which applied for and received conditional approval last year in January, and Protego Trust Bank, which received conditional approval last year in February. Unlike these two, Nexo bought its way into a federal bank charter instead of applying and waiting. It’s unclear how its unique situation will play out with regulators.

A predictable outcome could be Nexo settling the state lawsuits by agreeing to pay a fine and implementing changes to comply with regulations, such as registering its interest-earning accounts as securities with the U.S. SEC– this is how it worked out for rival BlockFi.

Apparently, Nexo isn’t letting the recent lawsuits hinder its planned expansion in the U.S., where it currently has tens of thousands of customers with billions of dollars invested in its platform.

Nexo says it currently manages over $4 billion in assets for customers, down from a peak of $15 billion last year. It’s a survivor of this year’s crypto market crash, which has led to prominent bankruptcies, including Voyager Digital and Celsius. BlockFi barely escaped with a bailout from crypto exchange FTX.