For many crypto investors, the opportunities to generate passive income are the best part of the market. It allows one not only to invest in a currency but also to stake that currency, putting it to work on a blockchain network for additional rewards. The completely unique feature of the DeFi space has sparked a buzz in the last few years, especially in the U.S. But, with all of the drama raining down on investors right now, there’s a legitimate threat to the future of staking. Nexo (NEXO-USD) is facing punishment by the U.S. Securities and Exchange Commission (SEC). The Nexo crypto earn product is on its way out of the States, and other staking products will likely follow.
The crypto environment is wildly hostile for a number of overlapping factors. Crypto prices are down, exchanges are struggling, prominent figures are landing in prison, and regulators are having a field day going after any project they please. Staking and other passive income-generating tools have suffered as a result as well. Of course, most of those affected by the many crypto company bankruptcies of yesteryear were those using staking products.
When Celsius fell into bankruptcy in July of 2022, it froze withdrawals from its exchange. When FTX collapsed in November, it froze withdrawals. Crypto lender Genesis froze withdrawals in November, causing strife for business partner Gemini as a result. Today, Genesis is filing for bankruptcy protections.
The freezes affect thousands upon thousands of customers and millions of dollars in assets. The reason companies do this is that they lack liquidity. By freezing withdrawals, they can keep liquidity on their balance sheets — usually to prevent failed margin calls. Since most investors only keep assets on exchanges to use staking features, these are the types of investors most affected.
Nexo Crypto Earn Product Is the Newest to Pull Out of U.S.
As a result of the bankruptcy wave washing over the market, these companies were pushed to desperate measures, and users of different earn tools were the most affected. The spotlight on staking has drawn attention from the SEC in recent months. With the government agency now increasingly scrutinizing the legality of these tools, the Nexo crypto earn product is the first to face punishment. It certainly won’t be the last either. And as Nexo pulls its earn product — as well as all other services — out of the U.S., others may choose to follow.
A major complaint among crypto companies and enthusiasts alike is the ambiguous terms by which U.S. regulators choose to investigate crypto projects. By taking a “regulation by enforcement” approach to the industry, the SEC is able to probe crypto companies at will. Nexo is one of the companies the SEC is seemingly randomly plucking up and analyzing.
The SEC’s investigation has made several conclusions about Nexo that could certainly affect other centralized crypto exchanges. First, it labeled the cryptos offered under Nexo’s earn product securities. As a result, it deems Nexo had illegally offered unregistered securities to investors. It also charges the company with “bypassing essential disclosure requirements” by not explicitly advertising what it does with staked assets to earn returns for investors. As a result of the investigation, the SEC is fining Nexo $45 million, as well as forcing the company to pull its earn product from U.S. customers. Nexo is agreeing to the terms; however, it has not admitted to nor denied the SEC’s findings.
Could Earn Products Be on the Way Out of the U.S. Entirely?
These findings by the SEC are sounding the alarm for nearly every crypto project that offers staking to its clients. The charges that the agency levies at Nexo are relatively ambiguous and could be applied to many staking products, should the SEC choose to investigate them.
It’s not as if Nexo had been blatantly skirting any rules, either. On the contrary, the company has been openly in communication with regulators, making changes to its earn product in line with regulatory clarity provided to it. The SEC’s ban on the earn tool isn’t much trouble for Nexo to endure; the company announced in December that it would be winding down operations in the U.S. entirely. It cites a “dead end” to its discussions with U.S. regulators as reason for the decision.
Indeed, Nexo had been plotting on exiting the American market well before today’s news. It is a negative signal to American investors that companies are opting to pull their products from the States, all while regulators choose to kick them on the way out. Nexo led discussions with regulators about making its product the most compliant it could be without any actual crypto laws in place. With it gone, and many earn products disappearing due to market volatility, there is reason to be concerned. Could this be the start of a mass migration of passive income tools leaving America? Maybe so — at least until regulators take a more concrete stance on the products.
On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.