SEC wants to sue Robinhood over crypto business

The US Securities and Exchange Commission (SEC) has issued a so-called Wells Notice to the major US neo-broker Robinhood. This advance notice of a lawsuit relates to Robinhood's crypto business. As with the SEC's complaints against Coinbase and Binance, the supervisory authority also believes that Robinhood's cryptocurrency-related services violate securities law.

The SEC has issued the Wells Notice solely against the crypto division of popular neo-broker, Robinhood Crypto (RHC).

On May 4, 2024, RHC received a Wells Notice from the staff of the SEC (the "Staff") stating that the Staff has notified RHC that it has made a "preliminary determination" to recommend that the SEC bring an enforcement action against RHC for alleged violations of Sections 15(a) and 17A of the Securities Exchange Act of 1934, as amended. The potential action may include a civil injunctive action, a public administrative proceeding and/or a cease-and-desist proceeding, and may seek remedies such as a cease-and-desist order, an injunction, compensatory damages, prejudgment interest, civil money penalties, and a reprimand, revocation and restraint of activities.
_{From the SEC filing}

Section 15(a) relates to the broker registration requirement and 17A relates to the settlement of securities transactions and the custody thereof. However, a Wells Notice does not necessarily mean that a violation has occurred.

The company stated that the agency's potential actions may include "civil injunctive relief, public administrative proceedings and/or cease and desist proceedings." Robinhood's share price fell briefly in response to the announcement, but has since recovered fully.

The neo-broker has already commented publicly on the Wells Notice and expressed disappointment and a lack of understanding for this step by the supervisory authority.

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 with respect to our U.S. crypto business. We firmly believe that the assets listed on our platform are not securities, and we look forward to working with the SEC to clarify how inadequate any case against Robinhood Crypto would be both on the facts and the law."
_{Dan Gallagher, Head of Legal, Compliance and Corporate Affairs at Robinhood}

The listed company also emphasizes that it has always been cooperative and has made "difficult decisions" not to offer certain tokens or services such as staking and lending. Last year, the trading platform stopped supporting tokens that were named as securities in SEC lawsuits against Binance and Coinbase, namely Cardano, Solana and Polygon.

The Securities and Exchange Commission appears to be continuing to crack down on services that it believes have violated securities laws. From the SEC's perspective, as previous litigation has shown, a large proportion of cryptocurrencies appear to fall under the regulation of securities, which is why they should have registered as such.

As the supervisory authority has not yet provided 100% clarity in this regard, crypto service providers are repeatedly defending themselves against accusations that they are offering services related to the trading of unregistered securities. For large exchanges such as Binance and Coinbase, this is also a relevant revenue driver with which a lot of money can be earned.

According to the SEC, Bitcoin is a commodity and therefore exempt from these legal disputes. It remains to be seen whether the courts will side with the authority and whether service providers such as exchanges will comply and cease trading and custody of most of the other crypto assets.