CFPB Issues Order Asserting its Authority to Investigate Cryptocurrency Lender

On November 22, 2022, the Consumer Financial Protection Bureau (CFPB) denied a petition by Nexo Financial LLC (“Nexo Financial”) to modify a Civil Investigative Demand (CID) issued on December 1 2021. In rendering its decision, the CFPB rejected Nexo Financial’s claim that the CFPB lacks authority to investigate their crypto-lending products, including its “Earn Interest Product.” The CID’s Notification of Purpose details that the purpose of the investigation was to determine whether “digital-asset companies” or associated persons have engaged in activities violative of the Consumer Financial Protection Act (CFPA) including (1) making false or misleading representations to consumers regarding, among other things, the safety and security of their digital assets; and (2) engaging in electronic fund transfers (“EFTs”) as defined in Regulation E and failing to follow Regulation E requirements. 

To support its assertion that the CFPB lacked jurisdiction, Nexo Financial cited the Security and Exchange Commissions’ (SEC) February 2022 decision in the case, In the Matter of BlockFi Lending LLC. According to the November 22 Decision and Order (“Order”), Nexo Financial posited that in BlockFi, the SEC “made patently clear that it believes interest-bearing crypto lending products are securities.” In response, the CFPB reasoned that Nexo Financial neither contends that the SEC has determined Nexo Financial’s Earn Interest Product is a security, nor that “offering the Earn Interest Product required Nexo Financial or any other Nexo entity to register with the SEC (whether as a broker, dealer, investment advisory, or for any other reason).”  

Additionally, in rendering its decision, the Order details that CFPB indicated that given the facts related to Nexo Financial’s Earn Interest Product, it was “impossible to tell” whether any of Nexo Financial’s conduct in connection with its Earn Interest Product might be subject to exclusion from the CFPB’s authority by the CFPA or to an exemption under Regulation E. Quoting the CFPA, the CFPB reasoned that under 12 U.S.C. § 5517(i)(1), “the Bureau shall have no authority to exercise any power to enforce [the CFPA] with respect to a person regulated by the [SEC].” The CFPB further described that a “person regulated by the SEC is defined as, among other things, a person who is “a broker or dealer that is required to be registered under the Securities Exchange Act of 1934. 

Further, according to the CFPB, it was too early in the investigation to determine if Nexo Financial was required to register with the SEC and if so, whether and to what extent, Nexo Financial was acting as a regulated entity. Ultimately, the CFPB determined that since Nexo Financial was “unwilling to concede that the Earn Interest Product is a security” and did not assert that it or any other Nexo Financial entity was a broker-dealer regulated by the SEC, it was also too early to determine whether the ETFs provided by the Earn Interest Product were subject to a Regulation E exemption.