On November 22, 2022, the Consumer Financial Protection Bureau (CFPB) issued an order denying the petition of Nexo Financial LLC (Nexo), a crypto financial services company, to modify the CFPB’s Civil Investigative Demand (CID) issued to Nexo regarding its interest-bearing products. A CID is the CFPB enforcement staff's primary fact-gathering device. CFPB enforcement staff may issue a CID whenever its staff believes that a person may be in possession, custody, or control of any documentary material or tangible things, or may have any information, relevant to a violation of any provision of federal consumer financial law (12 U.S.C. § 5562(c)(1)). The CID issued to Nexo requested information about:

The CID indicated purpose of the CFPB's investigation is to determine whether digital asset companies or associated persons:

The CID was also issued to determine whether CFPB action to obtain legal or equitable relief would be in the public interest.

In Nexo's petition to modify the CID to exclude EIP, Nexo argued that the CFPB lacked authority over EIP and its petition was timely even though the petition was filed more than 20 days after service of the CID and Nexo did not seek or obtain an extension to file the petition.

In denying Nexo's modification petition, the CFPB asserted that:

The CFPB concluded that the unsettled facts relate to EIP, making it impossible to determine without investigation whether any of Nexo's conduct in connection with the EIP might be subject to an exclusion from the CFPB's authority under the Consumer Financial Protection Act (CFPA), or to an exemption from Regulation E, which establishes the basic rights, liabilities, and responsibilities of consumers who EFTs and remittance transfer services, and of the financial institutions or others that offer these services.

Under CFPB rules relating to investigations and administrative discovery, 12 U.S.C. § 5562(f) and 12 C.F.R. § 1080.6(e), the deadline for responding to a CID is 20 calendar days from service of the CID or any time before the return date on the CID, whichever is earlier. Here, because the CID was served on December 1, 2021, and the return date was extended until April 5, 2022, the petition was due on December 21, 2021. Nexo did not file its petition until March 14, 2022 and did not request an extension of time to respond. Nexo contended its petition was timely because the deadline was effectively tolled by its ongoing efforts to meet and confer with CFPB's Office of Enforcement. However, the CFPB finds that theory inconsistent with the statutory and regulatory provisions governing extensions, which specify that extensions are to be granted in writing, by an assistant enforcement director or deputy assistant enforcement director of CFPB, and that requests for extensions are disfavored.

Nexo also asserted that in its order instituting cease-and-desist proceedings against BlockFi Lending LLC, the SEC determined that the BlockFi Interest Accounts (BIAs) fell within the definition of securities in Section 2(a)(1) of the and Section 3(a)(10) of the under the Howey and Reves tests (see Legal Update, BlockFi Settles With SEC and State Regulators Regarding Unregistered Crypto Lending Product). Nexo argued that as EIP are similar to BIAs and would be categorized by the SEC as securities. Consequently, because EIP would be considered a security by the SEC, the CID is defective because it requests testimony regarding subject matter that is beyond the CFPB’s authority to investigate.

The CFPB concluded that because Nexo was unwilling to concede that the EIP is a security and did not assert that it was a broker-dealer regulated by the SEC, it is too early to determine whether any of the fund transfers offered or provided by Nexo in connection with the EIP were subject to Regulation E’s exemption for securities transfers.

The order concludes by directing Nexo staff to appear for oral testimony on December 19, 2022.

On December 5, 2022, Nexo announced that it would gradually phase out its products and services from the US, indicating that good-faith efforts at dialogue with state and federal regulators had resulted in an impasse. Nexo's announcement indicated that as of December 6, 2022, EIP would no longer be available for clients in Indiana, Kentucky, Maryland, Oklahoma, South Carolina, Wisconsin, California, and Washington. During 2021 and 2022, Nexo had already off-boarded existing clients from New York and Vermont and suspended new registrations for US clients for EIP in cooperation with regulators.

Nexo argued that the unwillingness of various regulators to coordinate and take consistent positions have created an environment where Nexo cannot operate efficiently to create the expected value for its clients. Citing the CFPB CID decision as an example, Nexo argued the decision is inconsistent with the position of the SEC and state regulators, which have simultaneously insisted EIP is a security subject to their jurisdictions.