On January 14, 2026, the California Department of Financial Protection and Innovation announced an enforcement action and $500,000 penalty against crypto platform Nexo Capital Inc. for violating California's lender licensing requirement and consumer protection law. While federal financial services regulators have shifted their focus to developing clear regulatory frameworks for digital asset companies, California's action is a reminder that state regulators continue to emphasize enforcement against the crypto industry. In California, we expect scrutiny of crypto and other digital asset companies to ratchet up further as the state's crypto licensing requirements take effect this summer.
Background
Nexo Capital, Inc. ("Nexo Capital"), together with a group of affiliated companies ("Nexo group"), offer crypto products and services to consumers and businesses, including flexible and fixed-term crypto savings accounts, brokerage accounts, exchange services, custody services, and digital debit and credit cards for purchases made with cryptocurrency. The Nexo group has over $11 billion in assets under management. At issue here is the Nexo group's Credit Line product, which provides consumer and commercial loans in fiat or crypto backed by crypto collateral.
Nexo Capital, a Cayman Islands corporation, is not a licensed lender in California. Another member of the Nexo group, Nexo Financial, LLC, is a licensed lender under the California Financing Law (the "CFL"), which governs the licensing and regulation of companies engaged in consumer and commercial lending and brokering in California. The CFL is administered by California's powerful financial services regulator, the Department of Financial Protection and Innovation ("DFPI"). DFPI has broad licensing, supervision and enforcement authority over banks, credit unions, nonbank lenders including certain crypto companies, and money transmitters, among others.
In late 2022, the Nexo group withdrew from the U.S. market following multiple enforcement actions by state regulators, including DFPI.1 Notably, the Nexo group recently announced that it would return to the U.S. due to the more favorable regulatory environment under the Trump administration.2
California's Enforcement Action
On January 14, 2026, DFPI announced a consent order against Nexo Capital.3 DFPI alleged violations of the CFL and the California Consumer Financial Protection Law (the "CCFPL") in connection with the offering of Credit Line loans to approximately 5,000 California consumers between 2018 and 2022.4 During its examination and investigation, DFPI found that Nexo Capital:
- Engaged in Unlicensed Lending. Nexo Capital contracted for and originated loans with 5,456 California borrowers, without obtaining the required finance lender license under the CFL.5
- Failed to Properly Underwrite Consumer Loans. Nexo Capital violated California regulations requiring lenders to consider the ability of borrowers to repay the loans in the manner provided for in the loan contracts.6 DFPI found that Nexo Capital's practice of overcollateralizing loans, or requiring consumers to provide additional collateral as the loan-to-value ratio exceeded certain thresholds, was "not a substitute for evaluating a borrower's ability to repay a loan in the time and manner provided in the loan agreement."7
- Violated Consumer Protections. Nexo Capital's violations of the CFL and ability-to-pay regulations also violated the CCFPL, which prohibits companies that offer consumer financial products to California residents from (1) engaging in unlawful acts and practices with respect to a consumer financial product or service, and (2) providing to consumers a financial protect or service not in conformity with a consumer financial law.8
DFPI ordered Nexo Capital to pay a $500,000 penalty and cease and desist from violating the CFL and CCFPL, including ceasing all loan activity. DFPI also required Nexo Capital to transfer all California consumer funds from Nexo Capital to Nexo Financial LLC and notify those consumers that Nexo Financial LLC would be the entity that would conduct all future lending activities pursuant to its CFL license.9 Nexo Capital must also post this notice of transfer across its social media accounts.
Key Takeaways
- Failure to observe regulatory separateness creates enforcement risk. Financial services licenses are personal to their holder. They cannot be shared across a company's brand, and having a license for one entity does not protect its affiliates from unlicensed activities. Even so, it is notable that DFPI pursued an enforcement action against Nexo Capital for unlicensed lending, when its affiliate, Nexo Financial LLC, maintained a CFL license. This demonstrates that DFPI is prepared to devote enforcement resources to enforcing California's licensing laws on a technical and formal basis. Thus, licensing strategies need to consider the advantages and disadvantages of regulatory separateness alongside strategies to contain commercial exposure via strategies of corporate separateness. On the one hand, having a license may subject such entity to regulatory scrutiny, examinations, or consumer protection disclosures. On the other hand, short of certain agency, control, service provider, or other relationships, a licensed entity's regulatory exposure is typically separate from that of its affiliates. Product and regulatory counsel for crypto and Fintech companies should carefully consider their company's licensing structure as well as the relevant terms of service to ensure that services are offered by the appropriate licensed entity.
- Enforcement actions have a long tail. Nexo Capital originated the loans at issue between July 2018 and November 2022, yet DFPI entered into a consent order with Nexo Capital nearly eight years after the initial conduct. While the industry is currently focused on working with Congress and federal financial services regulators on their efforts to develop regulatory frameworks for digital assets through new legislation, guidance and regulations, companies should be aware that state regulators, like DFPI, can investigate and bring enforcement actions for historical conduct. Notably, there is no statute of limitations for unlicensed lending under the CFL. And DFPI can bring a civil action for violations of the CCFPL up to four years from the date of the discovery of the violation.10
- California's new Digital Financial Assets Law ("DFAL") licensing requirement is set to begin on July 1, 2026. The consent order is a reminder that failure to obtain the appropriate licenses in California is a material enforcement risk. On top of that, a new licensing regime for digital asset companies is about to go live in California. In 2023, the California Legislature passed the DFAL, which created a comprehensive regulatory scheme for digital assets, including certain crypto activities, similar to other such regimes in New York and Louisiana. Under the DFAL, companies that engage in digital financial business activity, which is defined broadly in California regulations, must either have or have applied for a license by July 1, 2026.11
1 California Joins $22.5 Million Multistate Securities Settlement Against Crypto Platform Nexo Capital, available at https://dfpi.ca.gov/press_release/california-joins-22-5-million-multistate-securities-settlement-against-crypto-platform-nexo-capital/.
2 Nexo Re-Enters the U.S. Market, available at https://nexo.com/blog/nexo-reenters-the-us-market.
3 DFPI Fines Crypto Lending Platform, Nexo Capital Inc., $500,000 in Penalties, available at https://dfpi.ca.gov/press_release/dfpi-fines-crypto-lending-platform-nexo-capital-inc-500000-in-penalties/.
4 The DFPI's consent order against Nexo Capital ("Consent Order") is available at https://dfpi.ca.gov/wp-content/uploads/2026/01/Consent-Order-Nexo-Capital-Inc.pdf.
5 Under the CFL, no person can "engage in the business of a finance lender or broker" without first obtaining a license from the DFPI. Cal. Fin. Code § 22100(a). A finance lender includes any person "engaged in the business of making consumer loans or making commercial loans." Cal. Fin. Code § 22009.
6 See 10 CCR § 1452. Section 1452 of the CCR was promulgated pursuant to Cal. Fin. Code § 22150, which gives the Commissioner of the DFPI authority to promulgate regulations to enforce the CFL.
7 Consent Order ¶ 14.
8 See Cal. Fin. Code § 90003(a)(1)–(2).
9 Consent Order ¶ 4.
10 See California Fin. Code § 90014(a).
11 Cal. Fin. Code § 3201. Under Cal. Fin. Code § 3102(i), a "digital financial asset business activity" is defined as:
(1) Exchanging, transferring, or storing a digital financial asset or engaging in digital financial asset administration, whether directly or through an agreement with a digital financial asset control services vendor.
(2) Holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another person or issuing shares or electronic certificates representing interests in precious metals.
(3) Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
(A) A digital financial asset offered by or on behalf of the same publisher from which the original digital representation of value was received.
(B) Legal tender or bank or credit union credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher from which the original digital representation of value was received.
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