SEC to Sue Robinhood Over Crypto Unit... Again

“We see this as consistent with the SEC’s approach of forcing crypto fights to the courts.” Although Robinhood Markets has constantly cooperated with the ongoing investigations, the SEC escalated its actions on May 6 by issuing a “Wells Notice.” 

The Securities and Exchange Commission (SEC) remains strict in its regulatory oversight of cryptocurrency exchanges, as seen in the recent issuance of a "Wells Notice" to RobinHood Markets.

The notice, which is usually taken as a last warning after Robinhood, complied with the SEC's investigative subpoenas of its cryptocurrency operations. The work of such a move might be claimed as a chance for Robinhood to convince that this broker has complied with the law. However, in practice, it is usually a kind of the beginning of the legal action, and there is already a lack of trust in such a way. 

Robinhood, a significant participant in the crypto market through its app, could now be subject to securities litigation - confirmed by Jason Warnick, the company's CFO, in the recent SEC filing on May 4th. The revelation showed that Robinhood Crypto had been in the sights of the SEC, receiving subpoenas to investigate its practices around cryptocurrency listings, custody, and general platform operations.

Although Robinhood is cooperating with the ongoing investigations, the SEC increased its actions by issuing a Wells Notice on May 6th. The notice pointed out the agency's "preliminary determination" and recommended that enforcement proceedings be suitable, implying that Robinhood Crypto breached the Securities Exchange Act of 1934. This action highlights an ongoing story of regulatory challenges that cryptocurrency platforms encounter when navigating the intricate U.S. securities landscape.

What Does the SEC "Wells Notice" Mean for Robinhood and Crypto?

If the SEC decides to act, this could escalate to a civil injunctive action, public administrative proceedings, or a cease-and-desist proceeding, as stated in the filing.

On May 6, Robinhood Chief Legal, Compliance, and Corporate Affairs Dan Gallagher publicly responded by saying he was "disappointed".

"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, he said.

During last June's testimony to Congress, Gallagher noted that 18 months of SEC talks had not settled how to register Robinhood's crypto trading activities. The company has repeatedly denied any securities violations, highlighting the regulatory environment as a "world of confusion around crypto" on its website in December 2023.

The efforts of the SEC to regulate the growing digital assets industry have significantly increased since the collapse of FTX in 2022 - whose founder, Sam Bankman-Fried, was convicted of fraud earlier this year for 25 years. Further legal actions have been taken by the commission against top crypto platforms like Coinbase, Binance, and Kraken. 

Recommended Read: Coinbase Ongoing Battle with SEC

In a policy note, TD Cowen analyst Jaret Seiberg said that the SEC's warning to Robinhood was obvious, observing that the brokerage has little reason to settle considering that SEC chairman Gary Gensler's term is up in less than two years, and could potentially change the SEC's stance on crypto enforcement.

"We see this as consistent with the SEC's approach of forcing crypto fights to the courts", Seiberg noted. "We also see little reason for Robinhood to settle given the political and legal changes that are possible in the coming years."

The stock of Robinhood was flat on Monday, with a 47% rise since January 2024. The company is expected to report its first-quarter financial results on Wednesday.

In the past, Robinhood had resolved numerous regulatory controversies, such as a $65 million SEC settlement in 2020 for not getting the best trade prices for its clients and over $70 million in 2021 to industry regulator Finra for alleged customer harm. 

Robinhood's Q1 Crypto Trading Volume Spikes Despite SEC's Recent Actions

Despite being under regulatory scrutiny, Robinhood recorded an uplift in its crypto trading volume by 224% to hit $36 billion in the first quarter. This spike resulted in impressive growth of crypto-related proceeds that rose by 59% year-over-year to $329 million. 

At present, Robinhood has $26 billion in assets under management, with $2 billion in users' crypto assets, which marks an increase of 78% from the end of 2023. 

Robinhood's first-quarter results surpassed forecasts, as the firm recorded earnings of $618 million, which was well above the $552 million expected. Its market share also exceeded the anticipated by $0.18 from the anticipated $0.06. 

Following this information, Robinhood shares traded up 7% in the after-hours trade, as the market is clearly optimistic about the company's performance.

 Robinhood CFO Jason Warnick disclosed the Wells Notice from the U.S. SEC concerning the company's crypto activities during an earnings call. While he has expressed his disappointment as mentioned above, he managed to calm everyone down by stating that the notice does not affect customer accounts and that "it's usual business" for the crypto division, showing the company's capacity to successfully navigate such situations.