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Robinhood Stock Suffers Following Warning From SEC: Wells Notice May Jeopardize Crypto Business

Published May 6, 2024 4:11 PM
James Morales
Published May 6, 2024 4:11 PM

Key Takeaways

  • The SEC has issued Robinhood’s crypto business with a Wells Notice warning that enforcement action could be on the way.
  • The firm stands accused of operating an unlicensed securities exchange.
  • Although Robinhood stock to a hit in premarket trading, the share price has recovered throughout the day.

Robinhood stock took around a 10% hit in pre-market trading on Monday morning after news broke that the Securities and Exchange Commission (SEC) had issued the company with a Wells Notice.

Although the share price has since recovered much of the lost ground, the threatened enforcement action casts a shadow over Robin Hood’s cryptocurrency exchange business. 

SEC Crypto Crackdown Comes For Robinhood

Given that it has already picked a fight with Coinbase, Binance and Kraken, it was probably inevitable that the SEC would target Robinhood’s crypto business eventually. 

Chart showing Robinhood share price.
Source: Google Finance

Drawing from a now well-established playbook, the regulator has accused  the firm of operating an unlicensed securities exchange and has issued subpoenas for information about its custodial cryptocurrency holding and operations.

For other exchanges, an initial Wells Notice was followed by formal enforcement action within a few months. 

Reduced Crypto Offering Not Enough to Protect Robinhood

Significantly, Robinhood has been targeted despite its efforts to appease the regulator by delisting tokens cited in lawsuits against Binance and Coinbase. Following SEC litigation, the crypto exchange ended support for SOL, ADA and MATIC last summer. 

The reduced offering could explain why Robinhood’s income from cryptocurrencies declined last year. From 24% in 2022, crypto trading fees fell to 17% of Robinhood’s transaction-based revenues in 2023.

Now, with a potential SEC lawsuit looming, there could be more trouble ahead.

Not all Bad News

Although the SEC’s complaint plunges Robinhood’s crypto business into uncertainty, any ultimate consequences of the case could still be years away.

Shareholders can take solace in the fact that Coinbase stock has more than recovered from the impact of the SEC’s complaint in June last year. Amid healthy revenue growth, the firm’s shares have increased by more than 400% to around $230.

Robinhood also has the advantage of being behind other crypto exchanges in the SEC’s enforcement conveyor belt. This will make it easier to navigate legal challenges as they come and will give the company time to adjust if it looks like an SEC victory is forthcoming.

Until then, crypto market performance and investors’ appetite for digital assets will play a much more important role in Robinhood’s valuation.

At the time of writing, Robinhood’s stock price had rebounded to over $18 per share, recovering its earlier losses.

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