The U.S. Securities and Exchange Commission (SEC) can’t stop prosecuting cryptocurrency companies

Source: CoinDesk

Robinhood is the latest company to anger the U.S. Securities and Exchange Commission (SEC) . This weekend, the company reported receiving a Wells Notice — an announcement that securities regulators are preparing a case and intend to prosecute. In an 8-K filing, the fintech company disclosed that it received a letter from the SEC’s Enforcement Division regarding alleged securities violations.

So far, it’s hard to be surprised by the SEC’s anti-crypto actions—brazen as they may be. Apparently, the SEC issued this notice after Robinhood cooperated with its investigative subpoena regarding its cryptocurrency business. Wells notices are essentially a defendant's last chance to convince regulators that they did not violate the law, which would be a sign of good faith, except that the vast majority of these letters end up in litigation.

As Robinhood head of legal, compliance and corporate Dan Gallagher

noted in a statement, the company has been Maintaining direct communication with the SEC regarding its cryptocurrency offerings is exactly what is expected from a company that is really only involved in cryptocurrencies. It’s unclear from the letter which tokens the SEC considers securities, but it’s worth noting that the broker has proactively removed some tokens from the list — 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 communicating with the SEC to make it clear that any of the SEC’s allegations against Robinhood Crypto are factually and legally untenable. Feet,"

Gallagher said. He specifically noted that the company has "made good-faith attempts over the years to work with the SEC to increase regulatory transparency" and that, like other cryptocurrency companies that have found themselves in legal trouble, it has "been known to try to 'get in and register.'"

Additionally, in response to “the call from the SEC,” Robinhood attempted to register as a special purpose broker-dealer with the agency. While there are many licensed cryptocurrency firms, so far

Prometheum Ember Capital—a trading firm that does not yet offer any assets for trading—is the only one licensed for special purpose brokerage trading The company has a merchant license, which was launched in 2020 and allows the company to custody and trade "crypto-asset securities."

Although this is just speculation, I have a feeling that the SEC started building its case around the time Gallagher (himself a former SEC commissioner and securities law expert) testified before Congress about the SPBD program (Special Purpose Brokerage Transactions) business program) completely failed and wasted a lot of resources. Specifically:

"When SEC Chairman Gensler says 'join and sign up' in 2021, We did it,” Gallagher said during a House Agriculture Committee hearing on cryptocurrency in June 2023. "We went through a 16-month process with SEC staff trying to register as a special purpose broker-dealer. We were then told in March that the process was over and our efforts would be fruitless."

So, in summary, the SEC, after seemingly denying the company that license, announced its intention to sue the company for failing to register for a license (although, to be precise, the SPBD license is issued by the self-regulatory organization FINRA).

This fits a long-term pattern. Since taking office in 2021, U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler has worked to curb the cryptocurrency industry, which he believes is within his purview (a controversial view). These efforts increased dramatically after the collapse of #FTX, which was particularly embarrassing for U.S. regulators because of Sam Bankman-Fried's close ties to them.

The SEC now devotes a disproportionate amount of time and money to prosecuting cryptocurrency companies large and small. The agency has filed lawsuits against at least one cryptocurrency company each month since November, most of which have flown under the radar and often ended in settlements.

“The SEC just issued a Wells Notice to Robinhood. The number of notices they’ve issued against cryptocurrencies in recent months is staggering. It’s hard to imagine they would (or could) pursue so many enforcements at once action,” Jake Chervinsky, head of legal at Variant Fund, said on X. “It looks like they are now abusing the Wells process as a scare tactic.”

In a sense, these lawsuits — especially those against high-profile companies like Coinbase and Robinhood — is an attempt to show that cryptocurrencies are inherently lawless. This isn’t just the SEC’s fault, it’s the result of more than a decade of Congressional neglect of cryptocurrency regulation and now being hampered by partisan gridlock.

Beau J. Baumann, a doctoral student at Yale Law School and co-author of an influential paper on cryptocurrency law, told CoinDesk: “I don’t know why the SEC Do it. But the rules cannot be changed now. "In this sense, the whole thing is insincere. If the enforcement action is illegal, it is even more obvious."

“Congress should enact new legislation to avoid legal pitfalls, but it’s unclear to me whether they will actually do so,” Baumann added. Gensler stated directly that he does not believe that cryptocurrencies need specific legislation or guidance because he believes that all cryptocurrencies except Bitcoin operate like securities.

While the SEC has achieved some legal victories, it has also suffered many court defeats. It’s unclear whether Robinhood will actually be taken to court and, if so, whether it will launch its own legal fightback, as Coinbase and ConsenSys have done.

If there’s a bit of good news here, it’s that after years of trying to swallow up the entire cryptocurrency market, Gensler’s SEC may have bitten off more than it can chew. Robinhood's stock price fell in premarket trading that day but has since rebounded, partly a sign that the market wasn't taking the action seriously, at least in substance.

After all, even if the SEC wins, it’s hard to imagine that stopping people from trading Stellar Lumens (XLM) or Dogecoin (DOGE) would do anything substantial.

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