New York AG targets Nexo and Celsius in digital currency lending purge

New York has become the latest state to join the digital currency lending purge that other states like New Jersey and Alabama started months ago. The state’s attorney general has issued a cease and desist letter to two lending firms, with three others receiving requests for information on how they handle their user deposits.

New York Attorney General Letitia James published two cease and desist letters addressed to the two lending firms on Monday. The letters were redacted, with the names of the firms under the whip withheld. On the three requests for information, the crucial details such as the company names had also been redacted when the letters were published.

However, the Office of the Attorney General had missed the labels on the letters, with one cease-and-desist letter retaining the name “Nexo Letter” while one request for information retained the name “Celsius Letter.” This mistake was quickly amended by the OAG’s office shortly after publishing.

The cease-and-desist letter gave the two firms just 10 days to wind up their operations in New York. They must confirm to the OAG that they have ceased all activities “or explain why the OAG should not take further action, including seeking all relief permitted by law.” The other three have until November 1 to respond to the request for information.

Digital currency lender Nexo Financial LLC confirmed that it was one of the recipients of the cease-and-desist letters in a statement. A source close to Celsius Network LLC, an embattled lender that’s being booted out by a number of U.S. state regulators, also confirmed to Bloomberg that the London-based firm had received a request for information.

In the press release, AG James was adamant that digital currency firms operating in New York must follow the state’s regulations.

She stated, “Cryptocurrency platforms must follow the law, just like everyone else, which is why we are now directing two crypto companies to shut down and forcing three more to answer questions immediately.”

James is accusing the companies of violating the Martin Act, a New York anti-fraud law that’s widely regarded as the most severe anti-securities fraud law in the U.S. As she pointed out, the Martin Act is a remedial statute, which means that its provisions “are to be given a broad reading.” This has been a loophole some digital currencies have exploited, claiming that since current laws don’t mention digital assets specifically, they operate in a gray area.

The NYAG accused the five companies of violating securities laws, stating, “The nature and function of the most common virtual currency lending products or services demonstrate that they fall squarely within any of several categories of “security” under the Martin Act.”

While it owned up to the cease-and-desist letter, Nexo has claimed that there must have been a mistake as it doesn’t offer its interest accounts in New York state. As such, “it makes little sense to be receiving a C&D for something we are not offering in NY anyway. But we will engage with the NY AG as to if this is a clear case of mixing up the recipients of the letter. We use IP-based geoblocking,” Nexo CEO Antoni Trenchev told media outlets.

With over $12 billion in assets under management, Nexo is one of the largest firms in the digital currency lending sector, alongside Celsius and BlockFi. The latter has been unavailable in New York, with a September 2020 announcement blaming “some of the state rules and regulations surrounding crypto.”

Celsius has declined to comment on the latest blow.

New York has now become the sixth state in the U.S. to crack down on digital currency lenders. New Jersey, Alabama, Kentucky, Vermont, and Texas have all taken measures to curb the practice, which they claim breaches securities laws. New York, however, is the first to crack down on five companies, with the other five only going after BlockFi and Celsius Network.

Watch: SEC Commissioner Hester Peirce on Bitcoin Association’s Blockchain Policy Matters