The U.S. Securities and Exchange Commission (SEC) cannot stop suing cryptocurrency companies

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 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 received a letter from the SEC's enforcement division regarding alleged securities violations.

So far, the SEC's anti-cryptocurrency actions have been hard to be surprised by—even if these actions may be shameless. Clearly, the SEC issued this notice after Robinhood complied with its subpoena regarding its cryptocurrency business. A Wells notice is essentially the last chance for a defendant to persuade regulators that they have not violated the law, which would be a sign of good faith, although the vast majority of these letters ultimately end in litigation.

As Robinhood's Chief Legal, Compliance, and Corporate Officer Dan Gallagher pointed out in a statement, the company has been in direct communication with the SEC regarding its cryptocurrency products for years, which is entirely in line with the expectations of a company that is genuinely involved in cryptocurrency. However, it is unclear from the letter which tokens the SEC considers to be securities, but it is worth noting that the brokerage has proactively removed some tokens from its list—including Solana (SOL), Polygon (MATIC), and Cardano (ADA)—in response to previous SEC lawsuits against competing 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 clarify that any allegations against Robinhood Crypto are factually and legally unfounded," Gallagher stated. He specifically noted that the company has "sincerely attempted to work with the SEC for years to enhance regulatory clarity," and like other cryptocurrency companies facing legal troubles, has made "well-known attempts to 'join and register.'"

Additionally, in response to the "SEC's call," Robinhood has attempted to register as a special purpose broker-dealer with the agency. While there are many licensed cryptocurrency companies, so far, Prometheum Ember Capital (a trading firm that has yet to provide any assets for trading) is the only company to have received a special purpose broker-dealer license, which was launched in 2020 and allows firms to custody and trade "crypto asset securities."

While it's just speculation, I have a feeling that the timing of the SEC starting to build a case was around the time Gallagher (who himself was an SEC commissioner and a 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 stated during a House Agriculture Committee cryptocurrency hearing in June 2023. "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 yield no results."

Therefore, to summarize, after seemingly refusing to issue the license to the company, the SEC announced its intention to sue the company for failing to register for the license (although to be precise, the SPBD license is issued by the self-regulatory organization FINRA).

This fits a long-standing pattern. Since taking office in 2021, SEC Chairman Gary Gensler has been committed to curbing the cryptocurrency industry, which he believes falls within his jurisdiction (a controversial view). Following the collapse of FTX, these efforts have ramped up sharply, particularly embarrassing for U.S. regulators given Sam Bankman-Fried's close ties to them.

The SEC is now investing a disproportionately large amount of time and money to sue cryptocurrency companies of all sizes. Since November of last year, the agency has filed lawsuits against at least one cryptocurrency company each month, most of which have gone unnoticed and typically end in settlements.

"The SEC just issued a Wells notice to Robinhood. The number of notices they've sent out regarding cryptocurrency in recent months is staggering. It's hard to imagine they would (or could) take so many enforcement actions simultaneously," Variant Fund's legal head Jake Chervinsky stated on X. "It seems they are 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 indicate that cryptocurrency is essentially lawless. This is not solely the SEC's fault but also a result of Congress's neglect of cryptocurrency regulation for over a decade and the current partisan gridlock.

Beau J. Baumann, a PhD student at Yale Law School and co-author of an influential cryptocurrency law paper, stated 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 lacks sincerity. If the enforcement actions are illegal, then making rules becomes even more obvious."

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

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

If there is any good news 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, which somewhat indicates that the market is not taking this action seriously, at least substantively.

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