Robinhood’s Crypto Unit Receives SEC Wells Notice

Robinhood, meet the Sheriff of Nottingham.

On Monday, the stocks-and-investing app announced it received a “Wells Notice” from the US Securities and Exchange Commission, with the agency saying it had made a “preliminary determination” to recommend enforcement against its crypto division for alleged violations of securities law. It all resurfaces the now time-worn question: What is crypto if not a security?

Insecure

The case, while still not a certainty, should surprise precisely no one. Last summer, the SEC sued crypto exchange Coinbase for allegedly operating an unregistered securities exchange. In a bid to stay ahead of regulators, Robinhood delisted several of the cryptocurrencies called out by the SEC in the Coinbase lawsuit. Robinhood also said last year that it tried, and ultimately failed, to register with the SEC as a special-purpose broker for digital assets — even with former SEC commissioner Daniel Gallagher guiding the process as its chief legal officer. Meanwhile, others in the crypto industry are playing offense; blockchain software firm Consensys, for instance, sued the SEC last month in a bid to block the agency from categorizing the cryptocurrency ether as a security. 

Recent developments in the Coinbase case may offer some strong clues to how Robinhood’s bout with the SEC may play out: 

• In late March, a judge in the Southern District of New York ruled that the SEC’s case against Coinbase could proceed to a jury trial, noting that the challenged crypto transactions “fall comfortably within the framework that courts have used to identify securities for nearly eighty years.”
• Still, Robinhood may have some wiggle room. The judge specifically called out Coinbase’s “staking program” — allowing users to earn a yield on certain crypto they hold — as an act of offering and selling unregistered securities; Robinhood has refrained from staking programs in a bid to avoid regulatory scrutiny.

Robinhood’s share price briefly went for a ride upon news of the Wells Notice, falling almost 10% in pre-market trading before recovering throughout the day. The firm reports first-quarter earnings on Wednesday.

Bit by Bit: Elsewhere in crypto land, bitcoin’s spot ETF honeymoon seems to be over. When the SEC finally approved the spot-bitcoin ETFs in January, it rocketed the flagship cryptocurrency to mainstream legitimacy — and all-time high values. By April, however, the top dozen or so ETFs saw net outflows of $182 million, while the price of bitcoin fell roughly 20% from its record a month earlier. Meanwhile, Reuters recently reported that the SEC is expected to deny applications to create similar spot ETFs tied to ether, the second-largest cryptocurrency.