New York Attorney General Letitia James has sued crypto firm Nexo for not registering the business as a security broker or dealer with the state’s Office of Attorney General (OAG). James also alleged that Nexo had misinformed its customers by claiming that the business was registered.
“Cryptocurrency platforms are not exceptional; they have to register to work like other investment platforms,” James said.
“Nexo has violated the law and the trust of investors by falsely claiming that it is a licensed and registered platform. Nexo must end its illegal operations and take the necessary measures to protect its investors.”
The lawsuit said that Nexo had advertised and sold a security product named Earn Interest Product—an interest-earning cryptocurrency account—that guaranteed high returns of up to 36 percent for investors. Nexo also allegedly engaged in unlawful securities and commodities trading through Nexo Exchange—the company’s cryptocurrency trading platform. Based on the OAG’s data, there were about 10,000 New York-based investor accounts in Nexo.
James said that Nexo had violated New York Executive Law § 63(12) and the Martin Act of New York. The attorney general demanded Nexo provide restitution to its investors and return revenue to the New York State for the firm’s illegal conduct. She also sought permanent injunctions of Nexo’s violations against New York’s regulations.
Reports said that James had been working to regulate the crypto industry within the state of New York to protect investors. Last year, the attorney general ordered unlicensed crypto firms operating in the state to cease their operations. In June this year, the OAG reached a nearly $1 million settlement with BlockFi Lending LLC for providing unregistered security assets to its investors.
She also encouraged crypto investors to report frozen accounts and fraudulent behaviors to the OAG in August. This request also applies to workers within the crypto industry who witness unlawful conduct. James said that these whistleblowers could report their companies anonymously.
New York and seven other states—California, Kentucky, South Carolina, Maryland, Oklahoma, Washington and Vermont—conducted an investigation on Nexo’s operation earlier this year. Other states also filed independent lawsuits against the crypto firm, saying that its practice prevented customers from making informed investment decisions.
Nexo has since responded to the allegation. The company said that only one asset listed would yield up to 36 percent of interest and that it did not advertise that interest rate in the promotional campaign. Nexo explained that most of its listed assets, including BTC, yielded single-digit interests.
The company also said that it understood the authorities’ wariness due to the turbulence in the crypto market that had caused several major crypto lenders to go bankrupt. Nexo claimed that it operated in a manner different from those companies.
“We have been working with U.S. federal and state regulators and understand their urge, given the current market turmoil and bankruptcies of companies offering similar products, to fulfill their mandates of investor protection by examining past behavior of providers of earn interest products,” Nexo said.
“As the recent months have clearly underlined, Nexo is a very different provider of earn interest products, as showcased by the fact that it did not engage in uncollateralized loans, had no exposure to LUNA/UST, did not have to be bailed out, or needed to resort to any withdrawal restrictions.”