Crypto Lending Firms in Kentucky Hit With Cease‑Trade Orders

The Division of Securities in Kentucky, a department that most outsiders would find difficult to identify, took a step in the fall of 2021 that would later appear to be subtly prophetic. It issued an emergency cease and desist order against Celsius Network, a New York-based cryptocurrency lending company that had been providing Kentucky residents with interest-bearing accounts on their cryptocurrency deposits, occasionally guaranteeing annual yields that had not been seen in decades for traditional savings accounts. It was a direct order. It claimed that Celsius was operating in “an unregulated market that represents an unprecedented risk to consumers,” offering unregistered securities, and failing to disclose to clients how it was using their funds.

In about a week, Kentucky became the fourth state to take action against Celsius. Similar notices were sent out by Texas, Alabama, and New Jersey in a brief period of time. This coordinated pressure campaign attracted the attention of the cryptocurrency industry but, as is sometimes the case, faded from the news before the real repercussions materialized. Celsius retaliated. Alex Mashinsky, the CEO, publicly stated that he was open to meeting with regulators to discuss the company. The business declared that it “wholeheartedly” disagreed with the accusations and that it would continue to cooperate with authorities in accordance with the law. That was in September of 2021. Celsius halted all consumer withdrawals in July 2022, citing “extreme market conditions.” The next month, it filed for bankruptcy.

In hindsight, the cease and desist orders were early indicators that regulators had discovered structural issues with the business model before most customers realized it. The fundamental problem wasn’t difficult. Celsius and its rivals were accepting cryptocurrency deposits from clients, promising returns, and allocating those deposits into different yield-generating strategies without the disclosure requirements that would apply to conventional investment products. Two months prior, in July 2021, BlockFi was hit with a similar Kentucky emergency order. The Kentucky order specifically pointed out that Celsius used terms like “rewards” rather than “interest” and “financing fee” instead of “loan,” which is what traditional lenders would say. The framing, according to regulators, was intended to avoid triggering securities law. Celsius maintained that it had nothing to do with that.

Because BlockFi followed a similar path, it is worthwhile to analyze it alongside Celsius. Weeks prior to the Celsius action, in July 2021, BlockFi, a foreign limited liability company registered in Kentucky, was issued an emergency cease and desist order after the state concluded that its lending accounts constituted unregistered securities offerings. Celsius’s response was less accommodating than BlockFi’s. In the end, it reached a settlement with the SEC and several states, paying $100 million in fines and promising to either properly register its products or close the accounts. It bought time. After learning of FTX’s demise in November 2022, it nevertheless declared bankruptcy.

Nexo arrived later. The Swiss-based cryptocurrency lender was ordered to stop offering yield-earning products in eight US states, including Kentucky, in September 2022. The coordinated action by Washington, Maryland, Kentucky, Oklahoma, South Carolina, and other states signified an increase in regulatory ambition and was the result of a year’s worth of evidence showing that the previous individual state orders had not been sufficient to alter industry behavior generally. In contrast to BlockFi and Celsius, Nexo did not fail. It left the US market mostly on its own initiative, opting to close American operations instead of continuing to battle on several regulatory fronts at once.

The geography of all this is instructive. Unlike New York or California, Kentucky is not a financial superpower. It lacks the headline reach and regulatory infrastructure of a securities authority located in Manhattan. However, the phrase “unprecedented risk to consumers” was first used in a public regulatory document about cryptocurrency lending in Kentucky’s September 2021 order. This phrase appeared in national coverage, entered the lexicon of state securities regulators nationwide, and may have set the tone for how the category would be handled for the next two years.

It’s difficult to ignore the fact that state-level regulators were working with less information, less authority, and fewer resources than federal agencies, yet they were still able to get closer to the issue more quickly. This was evident as the orders caused bankruptcies, which in turn led to congressional hearings and the creation of some real federal framework around digital assets between 2021 and 2024. When Celsius froze its platform, the SEC was still debating how to categorize crypto interest products. The question had not been addressed by the Federal Reserve. Kentucky’s order had already been sent.

Compared to September 2021, the regulatory landscape for cryptocurrency lending in the US has significantly changed. A portion of that shift is directly related to the collapses that these state initiatives were unable to stop. However, part of it can be traced back to this precise moment: before the damage was done, a state securities division in Frankfort, Kentucky, announced that something was wrong and signed a document stating as much.