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The SEC can’t stop suing crypto companies
Robinhood is the latest company to draw the ire of the US Securities and Exchange Commission (SEC). This weekend, he reported receiving a Wells Notice – an announcement that the securities regulator is initiating proceedings and intends to sue. In an 8-K filing, the fintech company disclosed that it received the letter from the SEC’s enforcement division over alleged securities violations.
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At this point, it’s hard to be surprised by the SEC’s anti-crypto actions, however shameless they may be. The agency apparently sent the warning after Robinhood cooperated with the SEC’s investigative warrants into its crypto operations. A Wells Notice is essentially the defendant’s last chance to convince regulators that he hasn’t broken the law, which would be a sign of good faith, except the vast majority of these letters end up in a lawsuit.
As Dan Gallagher, Robinhood’s Chief Legal, Compliance and Corporate Officer noted in a statement, the company has been in direct communication with the SEC about its cryptocurrency offerings for years, which is exactly what you’d expect from a company that really only dabbles in cryptocurrencies. It is unclear from the letter which tokens are considered securities by the SEC, although it is worth noting that the brokerage has proactively removed a number of tokens, including Solana (SOL)Polygon (MATIC) and Cardano (ADA) – in response to previous SEC lawsuits against rival trading firms.
“We firmly believe that the assets listed on our platform are not securities, and we look forward to working with the SEC to clarify how weak any case against Robinhood Crypto would be on both the facts and the law,” Gallagher said. He noted in particular the company’s “years of good faith attempts to work with the SEC to gain regulatory clarity” and, like other cryptocurrency companies in legal limbo, “the notorious ‘go in and register’ attempt.”
Additionally, in heeding “calls from the SEC,” Robinhood attempted to register as a special purpose broker-dealer with the agency. Although so far there are many licensed crypto companies Prometheus Ember Capitala trading firm that does not yet offer any assets to trade is essentially the only one to receive a special purpose broker-dealer license, which was introduced in 2020 to allow companies to store and trade “cryptocurrency securities”.
While this is just speculation, my sense is that the SEC began building a case right around the time that Gallagher, himself a former SEC commissioner and securities law expert, testified before Congress that the SPBD process is hopelessly broken and a profound waste of resources. That means:
“When SEC Chairman Gensler said in 2021, ‘Come in and register,’ we did,” Gallagher said at a June 2023 House Agriculture Committee hearing on cryptocurrencies. “We went through a process of 16 months with SEC staff trying to register [as] a special purpose broker-dealer. And then in March we were told rather summarily that that process was over and that we would not see any fruit from that effort.”
So, to summarize, the SEC has announced plans to sue a company for failing to register a license after apparently denying the company that same license (though to be precise, SPBD licenses are given out by the self-regulatory organization FINRA).
This fits a long pattern. Since taking office in 2021, SEC Chairman Gary Gensler has pledged to rein in the cryptocurrency industry, which he claims is his purview (a questionable argument). These efforts increased dramatically following the collapse of FTX, which was particularly embarrassing for US regulators given how coy Sam Bankman-Fried had been towards them.
The SEC now spends a disproportionate amount of time and money pursuing lawsuits against crypto companies, both large and small. The agency filed an application at least one cause per month since last November against a cryptocurrency company, most of which go unnoticed and typically end in a settlement.
“The SEC just sent a Wells notice to Robinhood. The number they have been posting about cryptocurrencies over the past few months is astonishing. It’s hard to imagine that they could (or could) take so many enforcement actions at once,” Variant Fund chief legal officer Jake Chervinsky said on X. “It appears they are abusing the Wells process as a scare tactic now.”
In some ways, these lawsuits, particularly those filed against large companies like Coinbase and Robinhood, are an attempt to signal that cryptocurrencies are essentially lawless. This isn’t exactly the SEC’s fault, but also the fact that Congress has slept on cryptocurrency regulation for over a decade and is now hamstrung by partisan gridlock.
“I do not know why [the SEC] they did what they did. But there’s no going back on the rules now,” Beau J. Baumann, a PhD. candidate at Yale Law School and co-author of an influential cryptocurrency bill paper, CoinDesk said in an interview. “In this sense it is all bad faith. If enforcement actions are illegal, writing a rule is much more obviously illegal.”
“Congress should pass new legislation to avoid legal pitfalls, but it is not clear to me that it will actually do so,” Baumann added. Gensler, for his part, has directly stated that he does not think cryptocurrencies need bespoke legislation or guidance, given his view that all cryptocurrencies, excluding bitcoin, walk and talk like securities.
While the SEC has achieved legal victories, it has also suffered many judicial losses. It remains to be seen whether Robinhood will actually be sued, and if so, whether it will follow the path of Coinbase and Consensys and mount its own offensive legal campaign.
If there’s a silver lining here, it’s that, after years of trying to eat the entire crypto pie, Gensler’s SEC may have bitten off more than it can chew. Robinhood shares fell in premarket trading today, but have since recovered, indicating in part that the market isn’t taking this stock seriously, at least in material terms.
After all, even if the SEC wins, it’s hard to imagine the tangible benefits of preventing people from trading Stellar Lumens (XLM) or dogecoin (DOGE).