The US Securities and Exchange Commission (SEC) has issued a warning to Robinhood Markets Inc., indicating a potential enforcement action concerning its cryptocurrency operations. This latest development underscores the regulator’s ongoing scrutiny of digital assets over several years.
Primarily known for its stock trading platform, Robinhood revealed on Monday that it received a Wells notice from the SEC’s enforcement staff. This notice signifies the regulator’s preliminary determination to recommend enforcement action against the company. Despite this, Robinhood’s shares experienced an uptick of up to 2.8% in New York trading. Robinhood will have the opportunity to address the SEC’s allegations before any regulatory action is taken. In some cases, a company’s response can persuade the SEC to reconsider its stance. However, if not, the regulator may proceed to litigate or settle with Robinhood to resolve the investigation.
Expressing disappointment with the SEC’s move, Robinhood’s chief legal officer, Dan Gallagher, stated that the company firmly believes the assets listed on its platform do not qualify as securities. The SEC declined to comment on the matter.
The document outlined that the prospective action could entail a civil injunctive action, a public administrative proceeding, or a cease-and-desist proceeding. Possible remedies that might be pursued encompass an injunction, a cease-and-desist order, disgorgement, pre-judgment interest, civil monetary penalties, as well as censure, revocation, and constraints on activities.
Under Chair Gary Gensler’s leadership, the SEC has asserted that most tokens are subject to its regulations, and platforms facilitating their trade should be registered with the agency. The SEC has initiated actions against various prominent cryptocurrency brokers and trading platforms, including Coinbase Global Inc.
In determining whether an asset falls under its securities rules, the SEC relies on a test outlined in a 1946 Supreme Court case. However, crypto advocates argue that many digital assets do not meet this standard and urge the SEC to revise its rules to accommodate the unique characteristics of the asset class.
Robinhood had previously disclosed receiving an investigative subpoena regarding its cryptocurrency offerings and custody services, among other topics. Although the company has ceased offering certain tokens, it continues to provide over a dozen, including Bitcoin, Ether, Litecoin, Aave, and Chainlink, according to its website.
While digital assets remain a significant component of Robinhood’s trading business, customer interest has diminished. Crypto’s contribution to Robinhood’s transaction-based revenue has declined since the pandemic-induced surge. In 2021, crypto accounted for less than one-fifth of Robinhood’s transaction-based revenue, compared to nearly one-third the previous year.
