Robinhood gets new legal threat from SEC as crypto crackdown continues

Robinhood (HOOD) said it has received warning from the Securities and Exchange Commission that the trading platform may face enforcement action related to its crypto business in the United States.

The so-called Wells notice, which Robinhood received on May 4, said SEC staff had made a “preliminary decision” to recommend action because of the violation of registration as a securities broker and transfer agent.

But the stock rose more than 1% in early Monday morning trading after falling as much as 7% before the market opened.

Robinhood warned in its statement that potential action by the SEC could mean a civil lawsuit and a civil lawsuit that could result in fines, cease-and-desist orders and other restrictions on crypto activities.

“We are disappointed that after years of good faith attempts to work with the SEC to provide regulatory clarity, including our well-known ‘show up and sign up’ initiative, the agency has decided to issue a Wells Notice,” said Robinhood’s chief legal, compliance officer. and corporate affairs officer Dan Gallagher said in a blog post.

The SEC has gone after a number of firms that allow U.S. customers to trade cryptocurrencies as part of a wide-ranging crackdown on the industry.

Last June, the agency filed a lawsuit against Coinbase (COIN), the largest U.S. cryptocurrency exchange, alleging that the agency was operating an unregistered exchange by allowing the sale of certain crypto tokens that it considers investment securities and therefore falls within the SEC’s jurisdiction. He had.

Currently, Coinbase and its CEO Brian Armstrong are fighting these allegations. They argued that cryptocurrencies sold through exchanges are more like baseball cards than securities.

Coinbase CEO Brian Armstrong speaks at a rally in Los Angeles on March 4. (Jason Armond/Los Angeles Times via Getty Images) (Jason Armond via Getty Images)

The regulator made a similar argument in a separate lawsuit against Binance, arguing that the exchange also allows certain digital currencies, which must be registered with the SEC, to be traded on its platform.

Robinhood’s chief legal officer made the same claim made by Coinbase on Monday, saying: “We firmly believe that the assets listed on our platform are not securities, and we look forward to engaging with the SEC to clarify how weak any case against Robinhood is.” .Crypto will be based on both facts and law.”

Robinhood had previously said that its crypto business was under SEC investigation, and the trading house announced that the SEC had sent subpoenas.

Electronic screens in New York’s Times Square announce Robinhood’s 2021 IPO. (AP Photo/Mark Lennihan, File) (ASSOCIATED PRESS)

What could make this legal threat less serious for Robinhood is that the trading firm makes much less of its total revenue from crypto trading compared to more crypto-focused firms, Mizuho analyst Dan Dolev noted in a research note on Monday.

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Robinhood generated total net revenue of $471 million in the fourth quarter of 2023, of which 9.13% came from crypto-related transaction fees.

“In our view, concerns about the notice are likely overblown,” said Dolev, who has a Buy rating on Robinhood’s shares.

Robinhood reported its first-quarter earnings after the market closed on Wednesday.

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto and other areas of finance.

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