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The SEC Targeting Robinhood Highlights the Regulator's Dwindling Credibility

The SEC is relying on decades-old laws to nebulously regulate cryptocurrencies.


The SEC has targeted Robinhood with a Wells Notice.
Credit: Foretoken Media 2024

Robinhood, the popular stock and crypto trading app, shed 2.5% of its stock price Monday on the news that the SEC issued the company a Wells Notice. According to a court filing.


The notice is an unofficial memo sent to a company whom the SEC has found to be in violation of one or more U.S. securities laws. In this instance, the SEC says that Robinhood is selling cryptocurrencies as unregistered securities.


Robinhood's Chief Legal Officer, Dan Gallagher, explained the company's stance in a Monday blog post:


“After years of good faith attempts to work with the SEC for regulatory clarity including our well-known attempt to ‘come in and register,’ we are disappointed that the agency has decided to issue a Wells Notice related to our U.S. crypto business [...] We firmly believe that the assets listed on our platform are not securities.”

As with other crypto-related companies over the last several years, the SEC is once again not playing fair with new, innovative companies. Robinhood is now the latest addition to the SEC's long list of undesirables. The company's cryptocurrency predecessors have included Ripple (XRP), LBRY, Block.one, and BitConnect, to name a few.


The SEC's Regulatory Problems


There are several problems that are being caused by the SEC – not crypto coins and related companies. Over the years, the SEC has lost credibility in the market for several reasons, here are a few:


Lack of Clarity and Guidance: The fundamental question revolves around the application of the Howey Test, a standard derived from a 1946 Supreme Court decision used to determine what constitutes an "investment contract", or security. Crypto companies contend that the unique nature of cryptocurrencies does not fit neatly into this decades-old framework. The SEC continues to refuse to clarify how the Howey Test applies to cryptocurrencies.


Inconsistent Enforcement: Companies point to a seemingly arbitrary approach to regulation, where some projects are penalized for securities violations while similar projects are not. This inconsistency can lead to uncertainty and hesitation among investors and developers in the crypto space. The capricious application/non-application nature of the SEC enforcement makes the regulatory body look like a witch hunting organization, the likes of which Matthew Hopkins would envy.


Retroactive Enforcement: Crypto companies argue that the SEC is applying laws to past behaviors based on new interpretations that were not clearly established at the time the actions were taken. This retrospective application can feel unfair to operators who believed they were complying with existing laws at the time. Plus, the nature of smart contracts on the blockchain is permanent, meaning that companies cannot go back and reconfigure a smart contract.


The SEC – Not Robinhood – Must Reform


It is almost inconceivable that cryptocurrencies are subject to the 1946 Howey Test, let alone the SEC Enactment of 1934. Nevertheless, this is how it is. If the federal regulator continues to unfairly apply/not-apply age-old laws, then they will continue to lose what credibility and enforcement power they have.


The SEC must adapt to the times and clarify just how these generations-old laws apply specifically to cryptocurrencies. By continuing to retroactively and inconsistently enforce laws which are unclear, they are simply leaving it to these new companies to forge their own path toward inevitable innovation.


The SEC cannot stop the cutting edge with childish tactics.

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