The Securities and Exchange Commission is preparing to sue Robinhood Markets’ crypto unit, ramping up its crackdown on digital-currency trading to target one of the most popular U.S. brokerage firms, the company said Monday.
Robinhood disclosed that its crypto unit received a so-called “Wells Notice” from SEC staff over the weekend, which said the staff had made a “preliminary determination” to recommend an enforcement action against the unit, called Robinhood Crypto, over alleged violations of securities laws.
The notice isn’t a final indication that the SEC will sue Robinhood. Firms that receive Wells notices are allowed to respond and tell the agency why it shouldn’t proceed with a civil lawsuit.
Robinhood said it was disappointed by the notice, saying it had attempted to work with the SEC in good faith for years to ensure that its crypto business was in compliance with securities laws.
“We firmly believe that the assets listed on our platform are not securities and we look forward to engaging with the SEC to make clear just how weak any case against Robinhood Crypto would be on both the facts and the law,” Robinhood chief legal officer Dan Gallagher said in a post on the company’s official blog.
If the SEC sues Robinhood, it could seek an order that would prevent the company from trading certain crypto assets in the future. Shares of Robinhood were up 1.4% in Monday morning trading, having recovered from a brief drop just after the opening bell.
An SEC spokesman declined to comment.
Robinhood, whose core business is stocks and options trading, is more conservative than many crypto-oriented businesses in the number of digital currencies it allows customers to trade and the services it provides.
Last year, after the SEC sued crypto exchange Coinbase for allegedly running an unregistered securities exchange, Robinhood delisted several cryptocurrencies that the agency deemed to be securities in its Coinbase lawsuit. Coinbase has rejected the SEC’s allegations and has been fighting the agency in court.
Robinhood doesn’t allow customers to earn yield on their crypto holdings through lending or “staking,” a type of service that has landed other firms in hot water with the SEC. In congressional testimony last year, Robinhood said that it had held discussions with the agency about how to register its crypto business, but ended the talks after a year and a half because the SEC couldn’t provide sufficient regulatory clarity.
Last month, two other prominent crypto firms disclosed that they had received Wells notices from the SEC and vowed to litigate with the agency: Uniswap Labs, creator of the largest decentralized crypto exchange, and Consensys, a developer of blockchain technology.
Consensys sued the SEC in a bid to stop the agency from classifying ether—the second-biggest cryptocurrency after bitcoin—as a security.
The SEC argues that crypto firms must comply with securities laws to ensure that investors in the freewheeling digital-currency markets benefit from the same protections against fraud and manipulation that exist in the stock market. The crypto industry argues that securities laws dating back to the 1930s are out of data and poorly suited to crypto.
The SEC has racked up some wins in recent court battles, but some judges have voiced skepticism about the agency’s expansive view of its jurisdiction, giving hope to crypto firms and their supporters.
It wasn’t clear from Robinhood’s disclosure on Monday which tokens offered by the brokerage were considered securities by the SEC. The SEC staff indicated they could sue over violations of laws that require broker-dealers and clearinghouses to register with the SEC when they trade securities with customers and take payments to settle their transactions, Robinhood said.
Robinhood has previously disclosed that Robinhood Crypto received investigative subpoenas from the SEC regarding the unit’s cryptocurrency listing, custody of cryptocurrencies and platform operations, among other topics.