Key Takeaways:
The US Securities and Exchange Commission (SEC) continues its run to bring enforcement action against crypto-related businesses after the agency issued a Wells Notice to Robinhood Crypto (RHC) – the cryptocurrency arm of stock brokerage firm Robinhood.
US Securities Watchdog Preparing to Sue Robinhood Crypto for Securities Law Violations
On Monday, the company confirmed that it received a notice from the financial regulator of possible securities law violation and consequent enforcement action. However, Robinhood maintains that its cryptocurrency listing does not constitute securities.
The Wells Notice from the SEC raises concerns about RHC’s cryptocurrency listings, custody practices, and overall operations of its trading platform. The firm behind the popular stock and crypto trading app could face injunctions, disgorgement, or civil money penalties.
In a statement, Robinhood’s chief legal officer, Dan Gallagher, said that the brokerage was disappointed with the SEC’s move, and company officials “firmly believe” that the digital assets listed on its platform cannot be considered securities.
Crypto Firms are Asking the SEC to Revise its Rules Regarding Cryptocurrencies
Robinhood officials have stated they will be prepared for the SEC investigation but have sought clearer regulatory guidance for handling crypto assets through previous registration efforts.
The SEC’s attempt to sue Robinhood follows a trend where the agency has brought similar regulatory action against other entities in the crypto industry, such as exchanges like Uniswap, Coinbase, Kraken, and Binance.
To determine whether an asset is covered by its securities laws, the SEC relies on the Howey Test articulated by the US Supreme Court in 1946. The test is also used to determine whether certain financial transactions qualify as investment contracts.
Crypto proponents have long argued that cryptocurrencies don’t meet the standards required by the test and have asked the SEC to revise the rules to take into consideration the unique characteristics of the digital asset class.
Robinhood’s Long-Standing Troubles with US Financial Regulators
This is not the first time that Robinhood has come under regulatory scrutiny.
In August 2022, Robinhood’s crypto division was fined $30 million by the New York Department of Financial Services (NYDFS) for “significant failures” in areas of anti-money laundering and cybersecurity regulations.
NYDFS alleged that the cybersecurity and AML programs adopted by the brokerage were “inadequately staffed” and did not have sufficient resources to address related risks. The regulator also alleged that Robinhood Crypto failed to timely transition from a manual transaction monitoring system to an automated one that was more adequate for its user base and the transaction volume it handles.
Similarly, in 2020, Robinhood agreed to pay $65 million to the SEC to settle a probe over misleading customers. The securities watchdog charged the company with deceiving customers about how the trading app made money and failing to deliver the promised best execution of trades.
The following year, Robinhood was fined $70 million by the Financial Industry Regulatory Authority (FINRA) for systemwide outages and misleading communication and trading practices. The penalties were related to technical failures experienced by the platform’s users in March 2020, and the company’s lack of due diligence before approving customers to place options trades and purveying misleading information about various trading aspects.
FINRA, a self-regulatory body that oversees brokerage firms and their registered representatives, fined Robinhood $57 million and ordered the company to pay nearly $13 million in restitution to clients for the damages it caused.
Robinhood has been offering crypto trading to its users since 2018 but the platform had to delist some tokens after receiving an investigative subpoena from the SEC regarding its listing and custody services.
Currently, the app supports trading and custody of 11 cryptocurrencies – Bitcoin (BTC), Ethereum (ETH), Solana (SOL), Dogecoin (DOGE), Shiba Inu (SHIB), Stellar (XLM), Ethereum Classic (ETC), Chainlink (LINK), Uniswap (UNI), Zcash, and Bitcoin SV (BSV).
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