The CFPB recently denied the petition of Nexo Financial LLC to modify the CFPB’s Civil Investigative Demand (CID) issued to Nexo, rejecting Nexo’s claim that the CFPB does not have jurisdiction to investigate crypto-lending products offered by Nexo such as its “Earn Interest Product.”  This is the first publicly-known action taken by the CFPB against a crypto-currency product provider.

The CID’s Notification of Purpose stated that the investigation’s purpose is to determine whether “digital-asset companies” or associated persons have engaged in various activities including (1) in connection with deposit-taking activities, making 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 in violation of the CFPA, and (2) engaging in electronic fund transfers as defined in Regulation E and, in connection with EFTs, failing to follow various Regulation E requirements, such as the requirements applicable to consumer liability for unauthorized transfers.

The CFPA provides that the CFPB has “no authority to exercise any power to enforce this title with respect to a person regulated by the [SEC].”  In addition, Regulation E excludes from its coverage “[a] transfer of funds the primary purpose of which is the purchase or sale of a security…, if the security…is…[r]egulated by the [SEC]” or “[p]urchased or sold through a broker-dealer regulated by the [SEC].”

In its petition to modify the CID, Nexo argued that its Earn Interest Product is structured substantially similarly to certain accounts offered by BlockFi Lending, which were the subject of an order issued by the SEC on February 14, 2022.  The SEC found that such accounts fell within the definition of “securities” in the Securities Act of 1933 and the Securities Exchange Act of 1934.  Nexo asserted that “the SEC made patently clear in the BlockFi Order that it believes interest-bearing crypto lending products are securities, and thus the CFPB is precluded from exercising jurisdiction over the Earn Interest Product.”

In denying Nexo’s petition, the CFPB, in a decision and order signed by Director Chopra, concluded that the petition failed to show that the Bureau lacks authority to investigate Nexo’s Earn Interest Product for the following reasons: 

  • Because Nexo was “attempt[i]ng to have it both ways,” the CFPB found the petition to be “doom[ed]…from the start.”  According to the CFPB, despite relying on the SEC’s finding regarding BlockFi’s accounts, Nexo was not contending that the SEC had determined that the Earn Interest Product itself was a security nor did  it “concede that the Earn Interest Product required [Nexo] or any other Nexo entity to register with the SEC (whether as a broker, dealer, investment advisory, or for any other reason).”  The CFPB referenced an email sent by Nexo to its customers [on February 8, 2022] in which Nexo indicated that it had submitted a registration statement to the SEC for any interest-bearing products and stated “’there is no guarantee it would be declared effective.’” According to the Bureau, this showed that Nexo was “trying to avoid answering any of the Bureau’s questions about the Earn Interest Product (on the theory that the product is a security subject to SEC oversight) while at the same time preserving the argument  that the product is not a security subject to SEC oversight.”
  • Citing the principle that a CID recipient cannot challenge a CFPB investigation by preemptively contesting facts that the CFPB might find where an investigation is not patently outside of the CFPB’s authority, the CFPB indicated that the facts related to the Earn Interest Product made it “impossible to tell” whether any of Nexo’s conduct in connection with the Product might be excluded from CFPB authority by the CFPA or exempt under Regulation E.   With respect to the CFPA exclusion, the CFPB points to the phrase “a person regulated by the [SEC]” and the definition of that phrase as an entity “required to be registered” under various securities laws.  The CFPB stated that Nexo had not claimed that it was required to be registered under any of these laws and instead “posits” that the SEC likely believes the Earn Interest Product is a security “while studiously avoiding stating that [Nexo] agrees with the presumed assessment or that [Nexo] is required to be registered with the SEC.”  According to the CFPB, it was too early in its investigation to determine if Nexo was required to be registered under any of the securities law and if so, whether and to what extent, Nexo was acting as a regulated entity with respect to the Earn Interest Product.
  • The CFPB concluded that because Nexo was “unwilling to concede that the Earn Interest Product is a security” and had not asserted that it or another Nexo entity was a broker-dealer regulated by the SEC, it was too early to determine whether the Regulation E exemption for securities transfers applied.  Specifically, the CFPB could not yet determine whether any of the fund transfers offered or provided by Nexo in connection with the Earn Interest Product were subject to the Regulation E exemption “let alone…conclude that every such transfer is exempt (as would be necessary to demonstrate that investigation of the Earn Interest Product is patently outside the Bureau’s authority).”