SEC crypto crackdown continues with Robinhood as lawsuit looms

In a recent SEC filing, Robinhood Markets Chief Financial Officer Jason Warnick confirmed that Robinhood Crypto has received investigative subpoenas from the SEC regarding its "cryptocurrency listings, custody of cryptocurrencies, and platform operations."

Despite Robinhood cooperating with these investigations, the SEC sent a "Wells Notice" on Monday, the filing said. The notice alerted Robinhood that SEC staff had made a "preliminary determination" recommending that the SEC "file an enforcement action" alleging that Robinhood Crypto had violated the Securities Exchange Act of 1934.

If the SEC sues Robinhood, the SEC filing said, that "may involve a civil injunctive action, public administrative proceeding, and/or a cease-and-desist proceeding." Potential remedies might include "an injunction, a cease-and-desist order, disgorgement, pre-judgment interest, civil money penalties, and censure, revocation, and limitations on activities."

In a press release, Dan Gallagher— Robinhood Markets' chief legal, compliance, and corporate affairs officer—said that Robinhood was "disappointed." The SEC issued the Wells Notice "after years of" the company's "good faith attempts to work with the SEC for regulatory clarity" ended last year without resolution, he said.

In 2022, Robinhood announced that 2 million customers—everyone on their waitlist—had access to its Crypto Wallet. In that blog, CEO and co-founder Vlad Tenev told customers that Robinhood's "goal" was to become "the most trusted and easiest to use crypto platform."

But achieving that goal would require more clarity from regulators, Robinhood found out. By last June, Gallagher had testified to Congress that a year and a half of engaged talks with the SEC did not help Robinhood get any more clarity on how to register its crypto trading business. This left Robinhood living in a "world of confusion around crypto," Robinhood said on its website in December 2023.

"The most fundamental problem in digital asset markets is that there is no clear guidance on which digital assets the SEC and Commodity Futures Trading Commission deem to be securities and commodities, respectively, and how cryptocurrency platforms and digital asset securities can be appropriately registered under federal law," Gallagher told Congress.

Robinhood is considered "more conservative than other US cryptocurrency businesses," The Wall Street Journal noted. And Robinhood has seemingly attempted to monitor SEC enforcement to ensure its crypto business does not commit any known SEC violations.

That's why Robinhood delisted cryptocurrencies flagged by the SEC during a Coinbase lawsuit, including Solana, Polygon, and Cardano, The Verge reported. And it's also why Robinhood prohibits cryptocurrency earnings from lending or staking, specifically because the SEC regards those products as securities, Robinhood's press release noted.

Likewise, Robinhood acts quickly to immediately offer SEC-approved cryptocurrencies on its platform. Robinhood's press release and SEC filing did not clarify which crypto products the SEC might be considering securities on its platform. Gallagher maintains there are no securities on Robinhood's platform.

"We firmly believe that the assets listed on our platform are not securities," Gallagher said.

Robinhood will now have an opportunity to plead its case to the SEC and potentially dodge the lawsuit. In the meantime, the company assured customers in its blog that "this development will not affect your account or the services we provide," declaring, "Robinhood Crypto is here to stay."

"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," Gallagher said.