Robinhood warns of threat of SEC lawsuits over cryptocurrency business

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Robinhood warned of an impending lawsuit from the Securities and Exchange Commission over its cryptocurrency business, in a sign that the U.S. regulatory crackdown on digital assets continues.

The retail brokerage said in a statement Monday that the SEC had submitted its documentation over the weekend cryptocurrency drives a so-called Wells Alert, which warns a company that it faces legal action. The regulator’s staff made a “preliminary determination” to recommend enforcement action against the company, which could lead to civil litigation, fines and restrictions on trading.

The SEC has taken a hard line on cryptocurrency enforcement, arguing that many tokens constitute securities and should be regulated as such.

Robin Hood, founded in 2013, says it has a client base of more than 23 million investors and $119 billion in assets under custody. In addition to its stock and options brokerage business, it offers commission-free trading of 15 cryptocurrencies in most U.S. states, according to its most recent annual report. Cryptocurrencies accounted for $135 million of its $785 million in transaction-based revenue last year.

The company said on Monday that it had “made tough choices not to list certain tokens or provide products, such as lending or staking,” to avoid falling afoul of the SEC’s policy stance on cryptocurrencies.

“After years of good faith attempts to work with the SEC to obtain regulatory clarity, including our notorious ‘go in and register’ effort, we are disappointed that the agency has decided to issue a Wells Alert regarding our cryptocurrency business in the United States.” said Dan Gallagher, Robinhood’s head of legal, compliance and corporate affairs.

“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 weak any case against Robinhood Crypto would be on both the facts and the law.”

The SEC said it “does not comment on whether or not a possible investigation exists.”

The SEC’s efforts to exert control over the growing digital assets industry have been successful intensified following FTX’s bankruptcy in 2022, culminating this year with founder Sam Bankman-Fried being sentenced to 25 years in prison on fraud charges. The agency has also sued major crypto platforms such as Coinbase, Binance, and Kraken.

TD Cowen analyst Jaret Seiberg said in a policy note that the SEC’s warning to Robinhood should not come as a surprise and noted that the brokerage has little incentive to settle such a lawsuit given SEC Chairman Gary’s tenure Gensler was set to expire in two years. His departure could lead to a change in the regulator’s position on cryptocurrency enforcement.

“We believe this is consistent with the SEC’s approach of forcing crypto fights into court,” Seiberg said in the note. “We also see little reason for Robinhood to settle, given the political and legal changes that are possible in the coming years.”

Robinhood’s stock price was unchanged Monday and is up about 47% since the start of 2024. The company will report first-quarter financial results on Wednesday.

The company has previously paid large sums to settle regulatory cases, including a $65 million settlement with the SEC in 2020 over allegations it failed to provide its clients with the best prices for transactions, and more than $70 million fines in 2021 by industry regulator Finra for alleged customer harm.

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