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Robinhood has warned of an impending lawsuit from the Securities and Exchange Commission over its cryptocurrency business, a sign that the U.S. regulatory crackdown on digital assets is continuing.
The retail brokerage firm said in a filing Monday that the SEC sent its crypto division a so-called Wells notice over the weekend, warning a company that it could face legal action. The SEC staff has made a “preliminary decision” to recommend enforcement action against the company, which could result in civil litigation, fines and restrictions on business activities.
The SEC has taken a hard line on cryptocurrency enforcement, arguing that many tokens constitute securities and should be regulated as such.
Robinhood was founded in 2013 and claims to have a customer base of more than 23 million investors and $119 billion in assets under management. According to its latest annual report, in addition to brokering stocks and options, the company also brokers commission-free trading in 15 cryptocurrencies in most US states. Cryptocurrencies accounted for $135 million of $785 million in transaction-based revenue last year.
The company said on Monday it had made “difficult decisions not to list certain tokens or offer products such as loans or staking” to avoid running afoul of the SEC’s policy stance on cryptocurrencies.
“After years of good faith attempts to work with the SEC to provide regulatory clarity, including our well-known attempt to come in and register, we are disappointed that the agency has decided to issue a Wells Notice in connection with our U.S. “To issue a crypto deal,” said Dan Gallagher, Robinhood’s chief legal, compliance and corporate affairs officer.
“We firmly believe that the assets listed on our platform are not securities, and we look forward to working with the SEC to make clear how weak a case against Robinhood Crypto is both factually and legally were.”
The SEC said it “does not comment on the existence or non-existence of a possible investigation.”
The SEC’s efforts to exert control over the growing digital assets industry have intensified following FTX’s failure in 2022, culminating this year with founder Sam Bankman-Fried’s 25-year prison sentence on fraud charges. The agency has also sued leading crypto platforms such as Coinbase, Binance and Kraken.
TD Cowen analyst Jaret Seiberg said in a key note that the SEC’s warning to Robinhood should come as no surprise, noting that the broker is considering the fact that SEC Chairman Gary Gensler’s term is within two would expire in years, I have little incentive to settle such a lawsuit. His departure could lead to a change in the regulator’s position on cryptocurrency enforcement.
“We view this as consistent with the SEC’s approach to forcing crypto fights into court,” Seiberg said in the note. “Given the political and legal changes that are possible in the coming years, we also see little reason for Robinhood to reach an agreement.”
Robinhood’s stock price was flat on Monday and is up about 47 percent since the start of 2024. The company is expected to report its first-quarter financial results on Wednesday.
The company has previously paid out large sums to resolve regulatory cases, including a $65 million settlement with the SEC in 2020 over allegations that it did not offer its customers the best prices on deals and fines of over $70 million in 2021 industry regulator Finra for allegedly harming customers.