Robinhood accused SEC of creating a “world of confusion around crypto.”
Continuing its crackdown on cryptocurrency exchanges, the Securities and Exchange Commission (SEC) may potentially sue Robinhood Markets over securities violations alleged in the popular investing app’s crypto unit, Robinhood Crypto said Monday.
In a recent SEC filing, Robinhood Markets Chief Financial Officer Jason Warnick confirmed that Robinhood Crypto has received investigative subpoenas from the SEC regarding its “cryptocurrency listings, custody of cryptocurrencies, and platform operations.”
Despite Robinhood cooperating with these investigations, the SEC sent a “Wells Notice” on Monday, the filing said. The notice alerted Robinhood that SEC staff had made a “preliminary determination” recommending that the SEC “file an enforcement action” alleging that Robinhood Crypto had violated the Securities Exchange Act of 1934.
If the SEC sues Robinhood, the SEC filing said, that “may involve a civil injunctive action, public administrative proceeding, and/or a cease-and-desist proceeding.” Potential remedies might include “an injunction, a cease-and-desist order, disgorgement, pre-judgment interest, civil money penalties, and censure, revocation, and limitations on activities.”
In a press release, Dan Gallagher— Robinhood Markets’ chief legal, compliance, and corporate affairs officer—said that Robinhood was “disappointed.” The SEC issued the Wells Notice “after years of” the company’s “good faith attempts to work with the SEC for regulatory clarity” ended last year without resolution, he said.
In 2022, Robinhood announced that 2 million customers—everyone on their waitlist—had access to its Crypto Wallet. In that blog, CEO and co-founder Vlad Tenev told customers that Robinhood’s “goal” was to become “the most trusted and easiest to use crypto platform.”Advertisement
But achieving that goal would require more clarity from regulators, Robinhood found out. By last June, Gallagher had testified to Congress that a year and a half of engaged talks with the SEC did not help Robinhood get any more clarity on how to register its crypto trading business. This left Robinhood living in a “world of confusion around crypto,” Robinhood said on its website in December 2023.
“The most fundamental problem in digital asset markets is that there is no clear guidance on which digital assets the SEC and Commodity Futures Trading Commission deem to be securities and commodities, respectively, and how cryptocurrency platforms and digital asset securities can be appropriately registered under federal law,” Gallagher told Congress.
Robinhood is considered “more conservative than other US cryptocurrency businesses,” The Wall Street Journal noted. And Robinhood has seemingly attempted to monitor SEC enforcement to ensure its crypto business does not commit any known SEC violations.
That’s why Robinhood delisted cryptocurrencies flagged by the SEC during a Coinbase lawsuit, including Solana, Polygon, and Cardano, The Verge reported. And it’s also why Robinhood prohibits cryptocurrency earnings from lending or staking, specifically because the SEC regards those products as securities, Robinhood’s press release noted.
Likewise, Robinhood acts quickly to immediately offer SEC-approved cryptocurrencies on its platform. Robinhood’s press release and SEC filing did not clarify which crypto products the SEC might be considering securities on its platform. Gallagher maintains there are no securities on Robinhood’s platform.
“We firmly believe that the assets listed on our platform are not securities,” Gallagher said.
Robinhood will now have an opportunity to plead its case to the SEC and potentially dodge the lawsuit. In the meantime, the company assured customers in its blog that “this development will not affect your account or the services we provide,” declaring, “Robinhood Crypto is here to stay.”
“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,” Gallagher said.
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Politico recently documented the SEC’s steady stream of legal victories, successfully persuading courts that the SEC has the power to police what happens on major crypto exchanges, including FTX, Coinbase, and Binance. Now, the SEC’s crackdown is expanding, Politico reported, and Robinhood appears to be the next potential major target.
Robinhood has promoted draft legislation that it claimed would finally clarify regulations and allow law-abiding crypto businesses to lawfully trade digital assets without fear of the SEC enforcing violations of “cryptic” regulations. However, that legislation has stalled in the House, Politico reported, and faces “deep skepticism” in the Senate.
But while many in the crypto industry have publicly insisted that more regulations are necessary to invest and innovate in crypto, others are quietly taking a different route and hoping to block legislation, according to data from Opensecrets.org that was compiled by the progressive think tank Public Citizen.
Public Citizen found that cryptocurrency industry super PACS have raised $102 million to elect pro-cryptocurrency candidates to Congress in 2024—ranking among the top three super PACs raising money this year.
More than half of the money, the report said, came from “direct corporate expenditures” from companies like Coinbase and Ripple Labs. Other funders include “billionaire crypto execs and venture capitalists, including $11 million from each of the founders of venture capital firm Andreessen Horowitz, $5 million from the Winklevoss twins, and $1 million from Coinbase CEO Brian Armstrong.”Advertisement
These super PACS, Public Citizen’s research director Rick Claypool alleged, are working “to stop enforcement crackdowns, block regulation that prevents fraud, and defeat candidates who support either.” And they’re seemingly succeeding, with “only one crypto-backed candidate” losing out of six primaries so far in 2024.
“During the 2022 midterm elections, then-FTX CEO and now-convicted felon Sam Bankman-Fried personified the cryptocurrency sector’s attempt to use campaign spending to maximize its political influence,” Claypool said. “Now a fresh crop of crypto corporations, execs, and their allies are back in the political fray, spending millions to tilt elections toward pro-crypto candidates and against attempts to hold the industry accountable and ensure it follows the law.”
Some in the crypto sector are also hoping this election cycle may get rid of SEC Chair Gary Gensler. Politico noted Gensler is “highly suspicious” of crypto and “among the industry’s most implacable foes.” Should Joe Biden be defeated in the presidential election, a different commissioner could be named chair, and Gensler may be out at the agency, Politico suggested.
But Gensler isn’t the only one at the SEC scrutinizing cryptocurrencies. In a recent speech, SEC enforcement director Gurbir Grewal said that the SEC has “been accused of picking winners and losers, stifling innovation, and driving crypto businesses to more favorable, foreign jurisdictions, wherever they may be,” Politico reported.
Grewal pointed to the SEC’s recent court wins to suggest that while the crypto sector claims that securities laws don’t apply to digital assets, courts have sided with the SEC in many cases proving that they do.
“The federal securities laws apply equally to everyone,” Grewal said. “You don’t get your own rules.”
