The Consumer Financial Protection Bureau (“CFPB”) recently issued an order (“Order”) denying a request by Nexo Financial LLC (“Nexo”), a cryptocurrency lender, to halt the CFPB’s investigation into its products and practices.
Wait, what investigation? Well, the CFPB, by issuing the Order, has for the first time publicly disclosed that it is investigating a cryptocurrency firm.
In its petition to modify or set aside the CFPB’s civil investigative demand, Nexo argued that the regulation of its “Earn Interest Product,” an interest-bearing crypto lending product, is outside of the scope of the CFPB’s authority. Instead, Nexo cited the SEC’s BlockFi Order, which found that BlockFi’s crypto lending product was a security, and posited that because the Securities and Exchange Commission (“SEC”) “believes interest-bearing crypto lending products are securities,” the Earn Interest Product should instead be subject to SEC regulation. Quite the argument to put on the record!
Notably, however, (as the CFPB no doubt pointed out) Nexo stopped short of stating that the SEC has in fact determined that the Earn Interest Product is a security nor does Nexo itself concede that it is a security. In denying the petition, the CFPB directed Nexo to appear for oral testimony on December 19.
A few days after the publication of the Order, Nexo posted a blog announcing a “gradual departure from the United States.” Nexo stated that over 18 months of “good-faith dialogue” with state and federal regulators had reached a dead end. The blog notes that “[a]lthough regulators initially encouraged our cooperation and a sustainable path forward appeared viable, the events of recent weeks and months and the subsequent change in regulators’ behavior point to the opposite.”
According to the blog post, as of December 6, the Earn Interest Product will no longer be available in ten states: New York, Vermont, Indiana, Kentucky, Maryland, Oklahoma, South Carolina, Wisconsin, California, and Washington. For eight of these states, this is likely in response to administrative orders issued in September that found the Earn Interest Product would qualify as a security (Indiana and Wisconsin have not publicly issued orders against Nexo).
As regulators continue the proverbial tug-of-war over who will regulate what aspect of cryptocurrency and companies dealing in cryptocurrency, the CFPB has now officially emerged as a player in the game. The Order sheds some much needed light on how the CFPB views at least one type of crypto product that it believes is under its jurisdiction. However, Nexo’s argument has merit in that the CFPB has no authority over persons regulated by the SEC, the CFTC or state securities regulators.
It is unclear at this time whether the CFPB staff has discussed jurisdictional issues related to Nexo with any of these other regulators. In that discussion, the question of “loan” vs. “security” for crypto lending products is foundational.