(Kitco News) – The U.S. Securities and Exchange Commission's (SEC) quest to bring the crypto industry to heel continues unabated as Monday brought news that the regulator has issued a Wells notice to Robinhood Crypto, causing the price of Robinhood shares to fall 2.5% in pre-market trading.
A court filing shows the Wells notice was issued on May 4, and relates to Robinhood’s cryptocurrency listings and crypto custodian operations.
A Wells notice is a formal notification issued by the staff of a regulatory body to inform a company or individual that the staff has completed its investigation and intends to recommend that the Commission take enforcement action against them.
“Robinhood Cryp (RHC) received a ‘Wells Notice’ from the Staff of the SEC stating that the Staff has advised RHC that it made a ‘preliminary determination’ to recommend that the SEC file an enforcement action against RHC alleging violations of Sections 15(a) and 17A of the Securities Exchange Act of 1934, as amended,” the filing said.
The SEC said potential consequences “may involve a civil injunctive action, public administrative proceeding, and/or a cease-and-desist proceeding and may seek remedies that include an injunction, a cease-and-desist order, disgorgement, pre-judgment interest, civil money penalties, and censure, revocation, and limitations on activities.”
After news of the Wells notice hit social media, Robinhood’s share price briefly fell 2.5% in pre-market trading, hitting a low of $17.50, but has since bounced back, and currently trades at $18.10, an increase of 0.15% for the session.
According to Dan Gallagher, Chief Legal, Compliance and Corporate Affairs Officer at Robinhood Markets, the Wells notice comes as Robinhood has been working to register with the regulator but has faced numerous challenges.
“After years of good faith attempts to work with the SEC for 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 related to our U.S. crypto business,” Gallagher said in a blog post. “We firmly believe that the assets listed on our platform are not securities and 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 added that the Wells notice comes even though Robinhood Crypto “has made difficult choices not to list certain tokens or provide products, such as lending and staking, that the SEC previously alleged are securities in public actions against other platforms,” while also “heeding the SEC’s calls and attempted to register a special purpose broker-dealer with the agency.”
Gallagher, who served as SEC commissioner from 2011 to 2015, previously pushed back against the SEC's regulatory approach, saying that “the lack of federal regulatory clarity has created an uneven playing field for market participants and hindered the broader adoption of digital asset products and services in the U.S.,” and makes regulatory compliance difficult.
While testifying before the House Committee on Agriculture on June 6, 2023, Gallagher compared the regulatory landscape for cryptocurrency companies to equities regulations in 1932.
“Unfortunately, Robinhood and other digital asset market participants in the U.S. face a patchwork of state regulatory frameworks, not all of which are consistent, as well as a lack of regulatory clarity at the federal level,” he said. “In many ways, the regulatory landscape for digital assets is like it was for the equities markets in 1932.”
Gallagher told Robinhood customers that the Wells notice “will not affect your account or the services we provide,” adding that “Robinhood Crypto is here to stay and we’ll keep innovating, shipping products, and fighting for regulatory clarity for the good of the industry and our customers.”
The Wells notice to Robinhood comes on the heels of the SEC issuing a Wells notice to Uniswap Labs on April 10 after investigating the developer behind Unisawp, the top decentralized exchange, since 2021.
Previously, the SEC issued Wells notices to Coinbase and Binance warning about legal actions against the cryptocurrency exchanges, which were ultimately followed by lawsuits.
According to Jake Chervinsky, Chief Legal Officer at Variant, the SEC “seems like they’re abusing the Wells process as a scare tactic now.”
“The number they've sent about crypto in recent months is astonishing. It's hard to imagine that they would (or could) bring so many enforcement actions at once,” he added. “The SEC allocates a grossly disproportionate amount of its resources to crypto, given that its actual purpose is to regulate equity and debt markets.”
“Every minute and taxpayer dollar spent on crypto is one not spent on the real mission that Congress created the SEC to pursue,” Chervinsky said. “If the SEC brings as many enforcement actions as it has sent Wells notices, it will be in flagrant violation of both the law and its Congressional mandate.”
“If not, it's clearly abusing the Wells process to get free discovery and terrorize upstanding U.S. companies,” he concluded. “Which is it?”
And according to former SEC Internet Enforcement Chief John Reed Stark, the SEC’s attack on crypto companies will continue as long as Democrats are in the White House.
“So long as the Democrats are in charge of the SEC, because it’s become such a partisan issue, the SEC’s crypto onslaught will continue,” Stark said during a crypto regulatory discussion in August. “There will be no regulatory relief, there will be no slowing down of enforcement actions, there will be appeals, there will be aggressive cases, there will be all sorts of joint work with the FBI who have their own crypto unit.”
The silver lining for crypto enthusiasts is that “because the issue has become so partisan, what’s gonna happen is that, if a Republican gets elected there will be a complete reversal, I think, of just about all that except for the more egregious cases of fraud,” Stark said. “But, as far as regulatory pronouncements, when it comes to whether Coinbase, Binance, Beaxy, and Bittrex and all these crypto intermediaries are acting as broker-dealers or exchanges or clearing firms – those sort of cases are going to stop if a Republican gets elected.”
