- Robinhood received a Wells Notice over some crypto tokens that the SEC believes are trading as unregistered securities.
- The issue of which crypto tokens the SEC considers to be securities has been festering for years due to unclear guidance.
Robinhood Crypto Receives Warning from SEC
Robinhood’s crypto arm received a Wells Notice from the SEC on May 4th, 2024.
A Wells Notice is a notification that an investigation has been conducted and certain enforcement may be undertaken.
Although a Wells Notice can lead to prosecution, they are not a guarantee that the SEC will take action.
The Wells Notice focuses on a few crypto tokens traded on the Robinhood platform that the SEC states are ‘securities’.
Coinbase received a Wells Notice for similar reasons in the past and is currently in legal proceedings with the SEC.
While the overall crypto market dropped on the news, it quickly recovered the losses.
Robinhood’s share price was unfazed by the news, and its traditional and crypto trading platforms continue to perform well.
Wells Notice Forces Robinhood to Fold or Fight on Crypto
Robinhood made an official announcement detailing the Wells Notice 2 days after receiving it from the SEC.
The Wells Notice official recommendation was that an enforcement action be undertaken over crypto tokens trading as unregistered securities.
The potential enforcement actions include cease-and-desist orders, direct sanctions and limitations on activities.
However, the purpose of a Wells Notice is to act as a warning, giving the recipient time to comply with the recommendations.
The recipient can also choose to rebut the allegations and challenge the impending action in court.
Unclear Guidance from SEC Driving Crypto Confusion
At the heart of this issue is the unclear guidance from the SEC on what makes a specific crypto token a ‘security’.
So far, the SEC has simply been picking which crypto tokens it thinks are securities without any explanation.
This leaves crypto exchanges with the impossible task of attempting to guess which crypto tokens are safe to trade.
This lack of guidance has persisted despite numerous attempts by Robinhood and other crypto exchanges to have the SEC divulge its reasoning.
Robinhood’s crypto arm had already delisted tokens that were the subject of enforcement on other exchanges.
“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.”
– Dan Gallagher, Chief Legal, Compliance and Corporate Affairs Officer of Robinhood Markets, stated.
Robinhood Wells Notice Not the First to Hit Crypto
Robinhood is not the first exchange to run into trouble with the SEC over crypto trading.
Coinbase, Kraken and Binance have all had similar warnings or enforcements over allowing the trading of certain crypto tokens as unregistered securities.
The SEC wants these exchanges to register as broker-dealers, which comes with additional legal and regulatory burdens.
All these exchanges have pushed back on the notion that the crypto tokens in question should be considered securities.
Coinbase’s legal dispute over the matter is ongoing.
