SEC Wells Notice to Robinhood Crypto continues trend of probes in digital asset industry

The Securities and Exchange Commission is ratcheting up its purview of the crypto industry after filing a Wells Notice against Robinhood's crypto arm on Monday. 

In a Form 8-K filed on Monday, Robinhood Crypto, the crypto unit of the brokerage firm Robinhood Markets, said it had received a Wells Notice from the SEC. The exchange said the SEC staff has decided to recommend an enforcement action against the crypto unit, alleging securities violations, according to the form used to announce major events to shareholders. 

Robinhood's Wells Notice is one of a handful filed against crypto entities over the past month. Consensys, the crypto firm behind MetaMask Wallet, and decentralized crypto exchange Uniswap have said they also received Wells Notices from the SEC last month. 

"It's the latest in a series of recent Wells Notices that seem to cover a broad swath of different types of actions, but they all relate to the crypto space," said Gary DeWaal, senior counsel at Katten Muchin Rosenman LLP, in an interview with The Block. "I think it's evidence of continued SEC interest in the crypto space and desire to assert its jurisdiction in areas that, frankly, it's not clear that they have."

SEC staff sends a Wells Notice to let the entity or person know that the SEC has made a "preliminary determination" that the agency plans to file an action against them and also lays out the securities law violations in question, according to the agency's enforcement manual. The firm or person can then try to dissuade the SEC from filing an enforcement action. The commission then votes in closed meetings or by seriatim, meaning voting without holding a meeting, according to the manual. 

Crypto lawyers have accused the agency of sending a high number of Wells Notices to crypto firms over the past few weeks. Meanwhile, SEC Chair Gary Gensler has publicly said that he believes most cryptocurrencies are securities and has urged crypto firms to register with his agency. Some in the crypto industry have pushed back, saying it's not possible to register and calling for clearer rules. 

Crypto-friendly lawmaker House Majority Whip Tom Emmer, R-Minn., accused the agency on Monday of "regulation by intimidation" in a post on X. 

“These Wells notices seem to be Gary Gensler's desperate, last-ditch attempts to intimidate and antagonize digital asset innovators," Rep. Emmer said in an emailed statement to The Block. "Over the last few years, the SEC has completely embarrassed itself in its various court cases, and now Chair Gensler wants to hide behind the threat of lawsuits to an industry that, frankly, hasn’t shied away.” 

Rep. Emmer, along with other lawmakers, will hold a hearing on Tuesday titled "SEC Enforcement: Balancing Deterrence with Due Process," where crypto is likely to be discussed. The SEC's former Office of Internet Enforcement Chief John Reed Stark will testify tomorrow and plans to tell lawmakers that the SEC is enforcing the law, not taking an alleged "regulation by enforcement" approach, according to a post on X on Monday. 

Is the SEC trying to declare eth a security?

It is still unclear if the SEC wants to fold ether into its jurisdiction through the Wells Notices. When Consensys sued the SEC last month over its categorization of ether, the company revealed that it had also been sent a Wells Notice. The notice included the SEC scrutinizing MetaMask Swaps and MetaMask Staking products, alleging that Consensys was acting as an unregistered broker-dealer, the firm said in its lawsuit.

Throughout the complaint, Consensys shed light on the SEC's focus on ether and accused the agency of trying to regulate ether as a security, citing an SEC "formal" order to investigate Ethereum ETH -1.47% a year ago. 

Past SEC charges against crypto entities have involved allegations such as not registering as an exchange or a clearing agency, DeWaal said. 

"There seems to be some claims now that eth is a security, which could underpin all of those actions," DeWaal said. However, without seeing the Wells Notices, it's unclear what each one relates to, DeWaal added. 

Consensys alleged that the SEC views eth is a security in its complaint, but Robinhood and Uniswap have not said whether their probes mentioned ether, said Daniel Davis, formerly general counsel at the Commodity Futures Trading Commission. Davis is also listed as an attorney for BAM Management U.S. Holdings for the case between Binance and the SEC. Davis is now a partner at Katten Muchin Rosenman LLP. 

However, if the SEC were to declare ETH a security, it would most likely be through an enforcement action, Davis added. 

So far, the SEC has not said explicitly that ether is a security in lawsuits lodged against big names in the crypto industry, including Kraken, Coinbase and Binance, Davis said. 

"In the Coinbase, Kraken and Binance cases, the SEC identifies 10 or 12 digital assets in each of those cases that they thought were securities transactions," Davis said. "Ether was not identified in any of those."

This all comes as digital asset firm Prometheum said it plans to custody ether, which it can only do if there is a security, Davis said. Prometheum, which has drawn the ire of the crypto industry, received a special purpose broker-dealer license from the SEC last year and, in December, got approval from FINRA to allow for digital asset securities clearing and settlement services through that SEC license. 

"So there's been some hints of the SEC thinking that ether is a security, but they've yet to actually come out and say it, so we're still kind of waiting if they're going to take that final leap or not," Davis said.