Robinhood is next in the crosshairs of US regulators.
Since the overnight bankruptcy of cryptocurrency exchange FTX and its sister company Alameda last November, regulators have stepped up their offensive against the crypto space.
This crackdown is playing out on several fronts.
The first is in court. The Department of Justice accused Sam Bankman-Fried, the founder of FTX and Alameda, of several counts of fraud. The former crypto king faces as much as 115 years in prison if found guilty on all the charges.
This aggressive approach from federal prosecutors is intended to send a strong message to players in this nascent financial-services industry powered by blockchain technology. For a sector often described as the world wild west, this is new.
The other regulatory offensive is led by the SEC, which seems to want to sow fear in the industry. The federal agency seems to have decreed that all cryptocurrencies except for bitcoin and possibly ether -- the two largest digital currencies in terms of market value -- all other tokens are securities.
Are All Tokens Securities?
This approach has serious consequences for the sector because it means that most firms currently offering the sale and purchase of cryptocurrencies may be violating the law.
A security is, according to the SEC, "an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.”
The regulator refers to a Supreme Court judgment of 1946, the Howey Test, that sets out what an "investment contract" is and would therefore be subject to U.S. securities laws. An investment contract exists if money is invested with expectations of profit.
Tokens, or coins, until recently have not been considered securities. This means that they escape strict regulatory supervision and are not subject to the same rules of financial transparency and disclosure as, for example, shares in a company would be. The listing process for tokens is also less strict than that for securities.
Market participants supervised by the SEC are subject to rules of disclosure, risk management, minimum liquidity levels, and more.
The SEC has thus launched investigations in recent weeks.
Robinhood has just disclosed in a regulatory filing on Feb. 27 that it had been subpoenaed by the regulator regarding its crypto activities.
"In December 2022, shortly after FTX filed for bankruptcy on November 11, 2022, and following the bankruptcies of several other major cryptocurrency trading venues and lending platforms earlier in 2022, including Three Arrows Capital, Ltd., Voyager Digital Holdings, Inc., and Celsius Network LLC (“Celsius”) (collectively, the “2022 Crypto Bankruptcies”), we received an investigative subpoena from the SEC regarding, among other topics, RHC’s cryptocurrency listings, custody of cryptocurrencies, and platform operations," the company said.
Robinhood Might Stop Offering Crypto Services
As a result, the brokerage firm warned that if the SEC or a court concludes that cryptocurrencies or certain cryptocurrencies are "securities," the platform would simply "ceasing support for such cryptocurrencies on our platform."
"It could also result in regulatory enforcement penalties and financial losses in the event that we have liability to our customers and need to compensate them for any losses or damages," Robinhood said.
"We could be subject to judicial or administrative sanctions for failing to offer or sell the cryptocurrency in compliance with securities registration requirements, or for acting as a securities broker or dealer without appropriate registration."
Besides Robinhood (HOOD), the SEC is also investigating Coinbase (COIN), Paxos and other firms offering stablecoins or crypto-related products that the regulator considers securities.
Stablecoins are pegged to other assets, like the dollar, in an effort to limit their volatility. They are widely used by many institutional investors who see them as a way to invest in the crypto industry, while protecting themselves from sharp market moves. They can move large sums worldwide in one click, without having to go through banks.
