Jai Sahu
Retail brokerage receives ‘Wells notice’ after prolonged efforts to gain regulatory clarity
Robinhood has indicated a potential legal challenge from the U.S. Securities and Exchange Commission concerning its cryptocurrency operations, highlighting the ongoing U.S. regulatory scrutiny on digital currencies.
The company reported in a recent filing that over the last weekend, its crypto division received a Wells notice from the SEC. This notice is a preliminary warning that legal action is being considered. The SEC’s staff have preliminarily decided to recommend enforcement actions, which could involve civil litigation, financial penalties, and restrictions on the company’s operations.
The SEC has been stringent in its enforcement related to cryptocurrencies, maintaining that many digital tokens are securities and should be regulated as such.
Established in 2013, Robinhood boasts a user base exceeding 23 million investors and holds assets under custody worth $119 billion. Apart from trading equities and options, it facilitates commission-free trading of 15 different cryptocurrencies in most U.S. states, as per its latest annual report. Last year, cryptocurrency transactions contributed $135 million to its $785 million in transaction-based revenues.
On Monday, the company mentioned making tough decisions like not listing certain tokens or offering products such as lending or staking to comply with the SEC’s cryptocurrency regulations.
“After years of earnest efforts to work with the SEC to clarify regulations, including our notable initiative to ‘come in and register,’ we are disappointed that the agency has chosen to issue a Wells notice regarding our U.S. crypto operations,” stated Dan Gallagher, Robinhood’s Chief Legal, Compliance, and Corporate Affairs Officer.
“We are confident that the assets on our platform are not securities and we are eager to discuss with the SEC to demonstrate the lack of strength in any case against Robinhood Crypto, both factually and legally.”
The SEC, on its part, stated that it “does not comment on the existence or non-existence of a possible investigation”.
Following the collapse of FTX in 2022 and the consequent 25-year prison sentence of its founder, Sam Bankman-Fried, for fraud charges, the SEC’s crackdown on prominent crypto platforms like Coinbase, Binance, and Kraken has intensified.
Jaret Seiberg, an analyst at TD Cowen, remarked in a policy note that the SEC’s warning to Robinhood was expected and highlighted that the broker had little motivation to settle such a lawsuit, especially with the term of SEC chair Gary Gensler ending in two years, potentially altering the agency’s stance on cryptocurrency enforcement.
“This aligns with the SEC’s strategy of taking crypto disputes to court,” Seiberg noted. “Robinhood has little reason to settle, considering the political and legal shifts that may occur in the near future.”
Robinhood’s stock remained stable on Monday and has risen approximately 47 percent since the beginning of 2024. The company is scheduled to release its first-quarter financial results on Wednesday.
Previously, Robinhood has settled significant regulatory disputes, including a $65 million settlement with the SEC in 2020 for not securing the best trade prices for its customers, and over $70 million in penalties in 2021 from industry regulator Finra for purported customer harm.