SEC warns Robinhood that its crypto business faces lawsuit

The U.S. Securities and Exchange Commission warned Robinhood Markets Inc. that it faces an enforcement action over its crypto business — the latest sign that the regulator isn’t letting up on its years-long crackdown on digital assets.

Robinhood, which is best known for stock trading, said on Monday that the SEC’s enforcement staff had sent the firm a Wells notice, indicating that it made an initial determination to recommend enforcement action. The company’s shares rose as much as 2.8% in New York.

The company will have the opportunity to respond to the SEC’s allegations before the regulator takes any action. Sometimes, the response persuades the SEC to back off. If not, then the regulator can sue or settle with Robinhood to resolve the probe.

Robinhood’s chief legal officer, Dan Gallagher, said in a statement that the firm was disappointed by the move and that company officials “firmly believe that the assets listed on our platform are not securities.” The SEC declined to comment.

The SEC under under Chair Gary Gensler has argued that most tokens are subject to SEC rules and that platforms where they trade should be registered with the agency. The SEC has brought cases against other high-profile crypto brokerages and trading platforms, including Coinbase Global Inc.

To decide whether an asset is covered by its securities rules, the SEC relies on a test laid out in a 1946 Supreme Court case. Crypto advocates say many digital assets don’t meet that standard and that the SEC should provide revised rules to take into account the unique characteristics of the asset class.

Robinhood previously disclosed that it received an investigative subpoena about its cryptocurrency listings and custody, among other topics. Although the company has stopped offering some tokens, it still offers more than a dozen including Bitcoin, Ether, Litecoin and Aave and Chainlink, according to its website.

Digital assets are an important piece of Robinhood’s trading business, though customer enthusiasm has waned. As a share of Robinhood’s trading-based revenue, crypto has been in decline since a pandemic-era boom. Crypto made up less than one-fifth of Robinhood’s transaction-based revenue last year, compared with nearly one-third in 2021.

(With assistance from Annie Massa.)