The Securities and Exchange Commission is gearing up to sue Robinhood over its crypto unit, the stock-trading company disclosed Monday.
“After years of good-faith attempts to work with the SEC for regulatory clarity, including our well-known attempt to ‘come in and register,’ we are disappointed that the agency has decided to issue a Wells Notice related to our U.S. crypto business,” Dan Gallagher, Robinhood’s chief legal officer, said Monday in a statement on the company’s blog. “We firmly believe that the assets listed on our platform are not securities and we look forward to engaging with the SEC to make clear just how weak any case against Robinhood Crypto would be on both the facts and the law.”
Robinhood disclosed in February that it received subpoenas from the SEC regarding its cryptocurrency listings, custody and platform operations.
But the company has taken pains to avoid offering services such as staking or lending that have sparked legal action from the SEC against other crypto firms.
Robinhood delisted several cryptocurrencies the SEC identified as securities in its lawsuit last year against Coinbase.
Robinhood held discussions with the SEC about how to register its crypto business, but ended those talks after roughly a year and a half because the agency couldn’t provide enough regulatory clarity, executives have testified to Congress.
Crypto executives have long derided the SEC over its reluctance to share its thinking as to how it defines a security. Coinbase even sued the agency to force it into explaining. The crypto exchange had previously accused the SEC of “regulation by enforcement,” threats and unnecessary intimidation.
Robinhood and Coinbase are hardly alone in being put on notice of enforcement actions. The SEC has sued Binance, Kraken and others, too. The agency engaged in a long-running court battle against Ripple that ended last year in a partial win for both. While Coinbase at the time called the case a “W [win] for the industry,” the SEC, too, came away with bolstered confidence, asking the judge to approve a $2 billion penalty against Ripple.
The Wells notice is no guarantee that the SEC will sue. Robinhood can respond and tell the agency why it shouldn’t continue with legal action.
The SEC, for its part, told the Financial Times on Monday it “does not comment on the existence or non-existence of a possible investigation.”
The SEC’s notice should not be a surprise, TD Cowen analyst Jaret Seiberg said in a note, adding that Robinhood has little incentive to settle if a lawsuit arises because SEC Chair Gary Gensler’s term expires in two years — likely before the case would be decided.
“We see this as consistent with the SEC’s approach of forcing crypto fights to the courts,” Seiberg said in the note, seen by the Financial Times.
Robinhood is no stranger to settlements with regulators. The trading firm paid $65 million to the SEC in 2020 over its failure to disclose details of its payment for order flow.
It paid nearly $70 million to the Financial Industry Regulatory Authority to settle allegations it misled customers, approved ineligible traders for risky transaction types, and failed to adequately supervise technology that left customers locked out of the platform during high-demand periods.
And Robinhood agreed in January to pay $7.5 million to settle allegations from Massachusetts regulators that the company “gamified” its app to prod inexperienced traders to make risky trades.
Crypto accounted for $135 million of the $785 million in transaction-based revenue that Robinhood reported last year, according to the Financial Times. That’s less than the roughly one-third it encompassed in 2021, Bloomberg reported.
Robinhood reports its first-quarter earnings Wednesday.
