Source: CoinDesk

Author: Daniel Kuhn

Robinhood is the latest company to anger the U.S. Securities and Exchange Commission (SEC). This weekend, the company reported that it had received a Wells notice - an announcement that the securities regulator is preparing a case and intends to file a lawsuit. In an 8-K filing, the fintech company revealed that it had received a letter from the SEC's enforcement division regarding alleged securities violations.

So far, the SEC's actions against cryptocurrencies have been hardly surprising - although these actions may be shameless. Apparently, the SEC issued this notice to Robinhood after the company cooperated with its subpoena regarding its cryptocurrency business. A Wells notice essentially gives the defendant a last chance to persuade the regulatory agency that it has not violated the law, which would be a good sign, except that the vast majority of these letters ultimately end in litigation.

As Robinhood's Chief Legal, Compliance, and Corporate Affairs Officer Dan Gallagher pointed out in a statement, the company has been in direct communication with the U.S. Securities and Exchange Commission for years regarding its cryptocurrency products, which is exactly what one would expect from a company that truly only deals with cryptocurrencies. However, it is not clear from the letter which tokens the SEC considers to be securities, but it is worth noting that the broker has voluntarily removed some tokens from its list - including Solana (SOL), Polygon (MATIC), and Cardano (ADA) - in response to previous lawsuits against competing trading companies by the SEC.

"We are confident that the assets listed on our platform are not securities, and we look forward to communicating with the SEC to make it clear that any allegations against Robinhood Crypto are factually and legally unfounded," Gallagher said. He specifically noted that the company has "sincerely tried to work with the U.S. Securities and Exchange Commission to increase regulatory transparency" over the years and, like other cryptocurrency companies in legal trouble, has made "well-known attempts to 'join and register.'"

In addition, in response to the "call from the SEC," Robinhood is attempting to register with the agency as a special purpose broker-dealer. While there are many licensed cryptocurrency companies, so far, Prometheum Ember Capital (a trading company that has not yet traded any assets) is the only company to have obtained a special purpose broker-dealer license, which was launched in 2020, allowing the company to custody and trade "cryptocurrency securities."

Although it is only speculation, I have a feeling that the time when the SEC began building its case was roughly after Gallagher (who himself was a SEC commissioner and securities law expert) testified before Congress that the SPBD program (special purpose broker-dealer program) was a complete failure and a waste of resources. Specifically:

"When SEC Chairman Gensler said 'join and register' in 2021, we did just that," Gallagher said at a June 2023 House Agriculture Committee cryptocurrency hearing. "We went through a 16-month process with SEC staff trying to register as a special purpose broker-dealer. Then, in March, we were told that the process was over and our efforts would not bear fruit."

In summary, after apparently refusing to issue the license to the company, the SEC announced its intention to sue the company for failing to register and obtain the license (although technically, the SPBD license is issued by the self-regulatory organization FINRA).

This fits a long-standing pattern. Since taking office in 2021, U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler has been committed to curbing the cryptocurrency industry, which he believes falls within his jurisdiction (a controversial view). These efforts have intensified sharply after the FTX collapse, which is particularly embarrassing for U.S. regulatory agencies, as Sam Bankman-Fried has close ties with them.

The SEC is now devoting a disproportionate amount of time and money to suing cryptocurrency companies large and small. Since November of last year, the agency has filed lawsuits against at least one cryptocurrency company every month, most of which have gone unnoticed and typically end in settlements.

"The SEC just sent a Wells notice to Robinhood. The number of notices they've sent to crypto in the last few months is staggering. It's hard to imagine they could (or should) take so many enforcement actions at once," said Jake Chervinsky, General Counsel at Variant Fund, on Twitter. "It looks like they're now abusing the Wells process as a form of intimidation."

In a sense, these lawsuits - especially those against well-known companies like Coinbase and Robinhood - are an attempt to demonstrate that cryptocurrencies are fundamentally lawless. This is not only the fault of the SEC, but also the result of over a decade of congressional neglect of cryptocurrency regulation and the current partisan deadlock.

Beau J. Baumann, a Yale Law School doctoral student and co-author of an influential cryptocurrency legal paper, said in an interview with CoinDesk, "I don't know why the SEC is doing this. But the rules can't be changed now." "In that sense, the whole thing is disingenuous. If the enforcement action is illegal, then the rules are even more obvious."

"Congress should pass new legislation to avoid legal pitfalls, but I'm not sure if they will actually do that," Baumann added. Gensler has directly stated that he believes cryptocurrencies do not need specific legislation or guidance, as he believes that all cryptocurrencies except Bitcoin operate like securities.

While the SEC has achieved some legal victories, it has also suffered many courtroom defeats. It is currently unclear whether Robinhood will actually be taken to court, and if it is, whether it will launch its own legal counterattack like Coinbase and ConsenSys.

If there is any silver lining here, it is that after years of trying to swallow the entire cryptocurrency market, Gensler's SEC may have bitten off more than it can chew. Robinhood's stock price fell in pre-market trading that day, but later rebounded, indicating to some extent that the market did not take this action seriously, at least in substance.

After all, even if the SEC wins, it is hard to imagine that preventing people from trading Stellar Lumens (XLM) or Dogecoin (DOGE) would bring any substantial benefits.

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