On December 1, 2022, the Consumer Financial Protection Bureau (Bureau) made public an administrative order denying Nexo Financial LLC’s (Nexo) petition to modify the Bureau’s civil investigative demand.  The order represents the first publicly known Bureau investigation of a digital asset company, in this case, over Nexo’s “Earn Interest” crypto lending product.

The Bureau served Nexo with a civil investigative demand in late 2021 seeking further information about whether Nexo products were subject to federal consumer financial law, and in particular Nexo’s compliance with the Consumer Financial Protection Act and regulations under the Electronic Funds Transfer Act.  Nexo sought to set aside the civil investigative demand and argued that, because the SEC had taken the position that other crypto lending products were securities, the Bureau was estopped from investigating it under provisions of federal law that preempt the Bureau from regulating securities products.

The Bureau rejected Nexo’s line of reasoning.  According to the Bureau order, “Nexo Financial is 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.”  The order continues, “This attempt to have it both ways dooms Nexo Financial’s petition from the start.”  The Bureau also found that Nexo’s petition was not timely filed.

As we recently noted, the Bureau has been increasing its attention to the digital asset sector.  The Nexo order includes a lengthy discussion about the breadth of its jurisdiction and ability to investigate potential violations of law.  As the crypto winter persists, we expect to see the Bureau continue to explore ways to assert its authority to regulate elements of the digital asset sector.

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