WA DFI AMONG MULTIPLE STATE SECURITIES REGULATORS INVESTIGATING NEXO EARNED INTEREST PRODUCT (EIP) ACCOUNTS

Monday, Sept. 26, 2022

CONTACT:
Lyn Peters, DFI Director of Communications
PH 360-902-8731, CommunicationDir@dfi.wa.gov

William Beatty, Director Division of Securities
PH 360-902-8760, dfi@dfi.wa.gov

Statement of charges issued against Nexo for violating Securities Act of Washington 

OLYMPIA – The Washington State Department of Financial Institutions (DFI) today announced that it has issued a statement of charges and intends to issue a cease and desist order regarding a cryptocurrency interest account provider, Nexo, in connection with Nexo’s Earn Interest Product (EIP) accounts.  Nexo has the right to request a hearing in the matter. 

Washington DFI alleges the following violations: Nexo has offered and sold unregistered securities in the form of its EIP accounts; Nexo’s co-founder has failed to register as sales agents; and Nexo and its co-founder have misrepresented and omitted material facts about the EIP accounts.

As of July 31, 2022, more than 93,300 United States residents had active Nexo EIP accounts, of which more than 2,368 were Washington State residents. These accounts collectively hold assets totaling more than $800 million nationally and more than $32 million in Washington State (as of the end of July 2022).

Nexo’s EIP accounts allow customers to deposit crypto assets with Nexo; in exchange, customers passively earn interest on those deposits. Nexo has offered investors interest rates of up to 36% on their deposited crypto assets, significantly higher than rates offered for short-term, investment grade, fixed-income securities or bank savings accounts. In offering its EIP, DFI found, Nexo failed to disclose material information about the investment, including, but not limited to, Nexo’s EIP interest generation deployment activities, Nexo’s legal and regulatory compliance in Washington, and the limitations of Nexo’s financial representations.

“Washington’s securities laws exist to protect investors, and taking action against entities that make unlawful offerings and those that mislead investors is an important part of the Division’s duties,” DFI Division of Securities William Beatty said. “These crypto-interest accounts are securities and Nexo has the legal obligation to fully inform investors of the risks and other attributes of these investments.”

After the DFI Securities Division’s regulatory inquiry into Nexo’s business, Nexo ceased offering its EIP to new investors in Washington State after Aug. 2, 2021. From approximately Aug.2, 2021, until approximately Feb. 19, 2022, existing Washington investors could make additional deposits into their existing EIP accounts and could continue to earn interest on their invested EIP Eligible Earn Assets. However, on Feb. 19, 2022, Nexo disallowed any U.S. investors who had not yet opened a Nexo Account from opening an EIP savings wallet and disallowed any existing U.S. investors from adding additional assets into their existing EIP savings wallets.

“While we strongly support innovation and new technology, including as it relates to investing, it’s important we provide regulation protecting investors,” DFI Director Charlie Clark said. “Cryptocurrencies and related investments are an often volatile investment product with higher risks. Investors need to read through all of an entity’s disclosures — including what may be quite a bit of fine print — to fully understand the risks.”

Washington State has been participating in a group of NASAA (North American Securities Administrators Association) member securities regulators focused on interest-bearing cryptocurrency accounts. Through this working group, Washington DFI participated in the investigation of Nexo.

Washington State DFI continues to investigate the Nexo matter, and will consider enforcement actions against firms that offer interest-bearing cryptocurrency accounts without complying with state law. Firms that need to register and deal with past unregistered activity should reach out to DFI’s Division of Securities, either online at https://dfi.wa.gov/securities or by mail, phone or fax at:

Mailing Address:
Department of Financial Institutions
Securities Division
P.O. Box 9033
Olympia, WA 98507-9033

Main Telephone: 360-902-8760
Toll Free Telephone: 877-RING DFI (746-4334)
Fax: 360-902-0524
TDD: 360-664-8126

Washington State investors are encouraged to use DFI’s licensee database or contact the Securities Division to verify the registration status of a firm before investing their money.

The action against Nexo comes on the heels of similar actions filed by Washington DFI and by other NASAA working group members.

Investors also should be aware that funds held on cryptocurrency trading platforms are likely not insured by the FDIC. Recently, the FDIC issued a Fact Sheet clarifying when an account is considered FDIC insured.

Tips for Investors:

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About DFI ▪ www.dfi.wa.gov ▪ 360-902-8700 ▪ 877-RINGDFI (746-4334)
The Washington State Department of Financial Institutions regulates a variety of financial service providers such as banks, credit unions, mortgage brokers, consumer loan companies, payday lenders and securities brokers and dealers. The department also works to improve financial education throughout Washington through its outreach programs and online clearinghouse www.dfi.wa.gov/financial-education. In addition to posting information about licensees and administrative actions, DFI uses the Web and social media to provide financial education information: www.twitter.com/DFIConsumers ■ https://dfi.wa.gov/financial-education/blog ■ https://www.youtube.com/user/WADFI ■ www.homeownership.wa.gov ■ www.instagram.com/wastatedfi/ ■ www.linkedin.com/company/state-of-washington-department-of-financial-institutions/

About the Division of Securities ▪ www.dfi.wa.gov/sd ▪ 360-902-8760 ▪ 877-746-4334, x 8760
The Division of Securities regulates securities investments, franchises, business opportunities, and off-exchange commodities sold in Washington and the firms and individuals that sell these products or provide investment advice. The Division handles complaints, conducts investigations, and takes appropriate enforcement actions to protect investors and combat fraud.

CHA Washington