Robinhood, a popular securities brokerage, is trying to convince the SEC that crypto is not a security.
Robinhood HOOD, +1.18% announced a Wells notice from the SEC for its crypto business on Monday. The SEC sent Robinhood this notice after a lengthy investigation to inform it of potential infractions and allow it to respond.
Robinhood responds. Robinhood Chief Legal, Compliance, and Corporate Affairs Officer Dan Gallagher said, “We are disappointed that the agency has issued a Wells Notice related to our U.S. crypto business. We believe the assets listed on our platform are not securities and look forward to working with the SEC to demonstrate how weak a Robinhood Crypto case would be on the facts and law.
Why stress that Robinhood’s crypto assets aren’t securities? As securities, they must be handled according to certain rules. Robinhood is under investigation by the SEC for listing these assets, crypto custody, and other platform operations.
Whether crypto should be regulated as a security, commodity, or fiat currency has long been debated. Robinhood and the SEC may disagree, but how retail investors treat crypto assets on Robinhood may be the answer.
Robinhood launched its app in 2015 to let retail investors trade stocks. The company began crypto trading in 2018. In 2022, Robinhood users could transfer crypto in and out, and in 2023, it launched its iOS crypto wallet (2024 for Android).
The user experience of buying and selling crypto on Robinhood was more like trading stocks. Before recently, Robinhood retail investors couldn’t send crypto payments like with a traditional wallet. Retail traders viewed crypto like Robinhood’s other investments.
Ben Schiffrin suggests the SEC regulate crypto like a security if retail investors can’t tell Robinhood’s crypto products from its other securities.
Schiffrin directs securities policy at Better Markets, a nonprofit that promotes financial reforms for the public good. Schiffrin says the SEC is doing its job.
Schiffrin: “The SEC is continuing to treat crypto like any other security.” “If the SEC finds a broker is a broker for unregistered securities, it will act. Whatever the SEC can do to protect retail investors is best for them.”
Robinhood may claim that crypto assets aren’t securities and don’t need regulations, but does the average investor use its platform understand security?
In Q1 2021, 9.5 million retail investors traded crypto on Robinhood. Robinhood users couldn’t access this crypto outside of Robinhood or send it as a payment, so they could only invest and hope for positive returns like other securities in their portfolio.
Robinhood attempts to distinguish crypto from other securities by not listing certain tokens or offering investment products like crypto lending and staking, fueling the “is crypto a security?” debate.
Robinhood earned more from crypto transactions than equity-based transactions in 2022 and 2023, so this debate is important. Wednesday will bring Robinhood’s quarterly earnings report.
Robinhood is not alone; the SEC has regulated several other crypto firms. How these changes will affect Robinhood retail investors is unknown.
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