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CFPB discloses its first known probe of a crypto firm, which is fighting the effort

The Consumer Financial Protection Bureau is investigating the cryptocurrency lender Nexo Financial in what could be the bureau’s first probe to determine if a crypto firm is abiding by consumer protection laws. 

The CFPB launched an investigation into Nexo Financial last year but only publicly disclosed its probe on Thursday by posting an order denying the company’s petition to halt the investigation.

Nexo argued that the CFPB has no authority to probe its so-called “earn interest product” on the theory that the product is a security subject to oversight by the Securities and Exchange Commission. But the CFPB noted that Nexo is not registered with the SEC and has not formally claimed that the product is a security subject to SEC oversight.

Nexo Financial, which is under investigation by the Consumer Financial Protection Bureau, marketed itself in April at the Bitcoin 2022 conference in Miami.

Eva Marie Uzcategui/Bloomberg

How the CFPB responds to crypto firms is of keen interest. Regulators and lawmakers are jockeying to assert their authority after the collapses of the crypto exchange FTX and the crypto lender BlockFi, both of which filed for bankruptcy last month. 

It is unclear whether Nexo was acting as a bank, taking in deposits or claiming to serve as a custodian of consumer funds. The CFPB is determining whether Nexo made false or misleading representations to consumers “regarding the ability to earn interest and the safety and security of their digital assets in a manner that is unfair, deceptive, or abusive,” the order stated.

Nexo said in March that it had ceased offering its earn interest product, which allows customers to lend digital assets in interest-bearing accounts, “to new U.S. clients.” It also said that it “began working to implement other changes by which current users would no longer earn interest on new funds in their Earn Interest Product accounts.”

CFPB Director Rohit Chopra signed the order denying Nexo’s petition to halt the investigation on Nov. 22. He ordered Nexo to appear for oral testimony on Dec. 19.

Nexo’s website says the company is licensed to engage in consumer lending and money transmitting in 28 states and the District of Columbia. But a notice states that the site is currently “under development,” and the site provides no information about the company, its products or its management.

The CFPB launched its probe of Nexo on Dec. 1, 2021. The civil investigative demand sought to determine whether Nexo was engaged in conduct subject to the Consumer Financial Protection Act and Regulation E, the latter of which gives specific protections to consumers when they transfer funds electronically. 

Nexo could not be reached for comment, and its co-founder Kosta Kantchev did not immediately respond to a request for comment. Lawyers for the company also did not respond to requests for comment.

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