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Last June, when the US Securities and Exchange Commission unveiled lawsuits against crypto exchanges Binance and Coinbase, the market reaction was swift and brutal. Investors pulled nearly $800mn in assets from Binance in a day while Coinbase lost more than a fifth of its market value in the week after the news was made public.
Fast forward 11 months and the SEC’s crackdown on the crypto industry continues apace. Robinhood is its latest target. The retail brokerage said in a filing last week that the SEC had sent its crypto unit a so-called Wells notice. That is essentially a warning that it was preparing to take legal action. Companies that receive Wells notices are allowed to respond and argue why they did not break the law.
Yet this time around, investors have shrugged off the news. Shares in Robinhood barely budged on the day. The absence of a market spasm is telling.
Since Gary Gensler took over as chair in 2021, the SEC has filed on average two lawsuits per month against a crypto company. Efforts to bring the industry to heel have focused in part on the argument that almost all digital tokens are securities. Crypto exchanges are therefore operating as an unregistered broker and dealing in unregistered securities. (Exchanges have argued in turn that cryptocurrencies should be treated as commodities.)
Despite the blitz of legal actions and the collapse of FTX in late 2022, bitcoin has recovered from its slump to trade at a new high this year. Shares in Coinbase and Robinhood have respectively tripled and doubled in value over the past 12 months. The approval of spot bitcoin ETFs earlier this year has boosted sentiment for the stocks.
But traders may also take the view that Wall Street’s top cop is unlikely to be around to finish the job. Crypto enthusiast Donald Trump is bidding for a return to the White House. Legal battles can also last for years. Gensler’s term ends in 2026.
Investors should not be so quick to dismiss the regulatory risks. Crypto has re-emerged as an important source of growth for Robinhood, which reported record quarterly revenue and net income this week. Crypto trading generated $126mn, or 20 per cent of net revenue, during the first quarter. That is up from $38mn, or 8.6 per cent of net revenue from the same period a year ago. It also dwarfs the $39mn generated from equity trading.
The return of crypto trading also helped boost the number of monthly active users to 13.7mn, the highest in nearly two years. Would-be investors need to ask how long Robinhood can continue riding the crypto wave.
pan.yuk@ft.com
