The Breakdown - Why the Robinhood Wells Notice Hits Harder

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Tuesday, May 7th, and today we are talking about the Robin Hood-Wels notice. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link at the show notes or go to bit.ly slash breakdown pod. Let's get to today's big news, which is that Robin Hood has received a Wells notice from the SEC. The Wells notice was disclosed to Robin Hood shareholders in a Form 8K filing on Monday,

Starting point is 00:00:46 and is, you guessed it, related to the firm's crypto division. Robin Hood said that SEC staff have decided to recommend enforcement action against the crypto unit alleging securities violations. This is the latest in a long series of Wells notices issued by the SEC against major firms in the industry. Uniswap and Consensus disclosed the receipt of Wells Notices last month. It's believed that a large number of subpoenas and Wells notices have been issued over the past year to firms working in the Ethereum ecosystem. A Wells notice is issued prior to SEC staff recommending enforcement action to the committee. The process is intended to give firms fair notice and an opportunity to discuss the allegations with the SEC in advance. Robin Hood's CEO Vlad Tenev writes

Starting point is 00:01:24 Over the last three years, we've reached a state of regulatory onslaught that is harmful to American companies and consumers. The SEC's continued attack on crypto, coupled with recent rule proposals like the one related to predictive data analytics, mark yet another improper attempt by the administrative state to stifle innovation. While we strive to maintain positive and productive regulations with our regulators, if necessary, we will use our resources to contest this matter in the courts, with the intent of both defending our crypto business and establishing regulatory clarity in the United States for the benefit of our customers. Dan Gallagher, the chief legal officer at Robin Hood Markets, added, after years of good faith attempts to work with the SEC for regulatory

Starting point is 00:02:01 clarity, including our well-known attempt to, quote, 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, and we look forward to engaging with the SEC to make clear just how weak any case against Robin Hood crypto would be on both the facts and the law. This is one of the most striking parts about this pending enforcement action. Since crypto regulation became more stringent under the current SEC, Robin Hood has gone out of their way in their attempts to comply with the regulatory landscape as it developed. The company applied for a special purpose broker-dealer license several years ago. They claimed to have gone through a 16-month application

Starting point is 00:02:38 process before being summarily told the process was over with no license issued. This is basically the same story told by Coinbase and a host of other crypto firms who attempted to engage with the SEC over recent years. Robin Hood even took the extraordinary step of delisting assets in response to them being named in an SEC lawsuit. After the SEC sued Coinbase and Binance, Robin Hood delisted Solana, Cardano, and Polygon's tokens. Very few crypto-native firms showed that level of deference to that round of SEC lawsuits. In fact, one of the big critiques at that time was that it was effectively the SEC having their way without having to prove anything in a court of law with simply the threat of regulatory action, meaning that no one had a chance to actually

Starting point is 00:03:15 defend those tokens as not securities. In response to the Robin Hood announcement, crypto lawyers attempted to reckon with the current state of SEC crypto enforcement. Jake Chavinsky, the chief legal officer at Variant Fund, wrote, the SEC just sent a Wells notice to Robin Hood. The number they've sent about crypto in recent months is astonishing. It's hard to imagine that they would or could bring so many enforcement actions at once. It seems like they're abusing the Wells process as a scare tactic now. The SEC allocates a grossly disproportionate amount of its resources to crypto, given that its actual purposes to regulate equity and debt markets. Every minute and taxpayer dollars spent on crypto is one not spent on the real

Starting point is 00:03:49 mission that Congress created the SEC to pursue. If the SEC brings as many enforcement actions as it has sent Wells notices, it will be in fragrant violation of both the law and its congressional mandate. If not, it's clearly abusing the Wells process to get free discovery and terrorizing upstanding U.S. companies. Which is it? Since the Deppock scandal where SEC lawyers were caught misrepresenting evidence in court, there has been a growing sense that the agency is acting in bad faith. Industry perceptions have moved from viewing the SEC as an aggressive litigator to one that is actively undermining principles of due process and rule of law. One assumption that many have reached is that Chairman Gary Gensler is pushing a win-at-all-cost approach to carry.

Starting point is 00:04:23 carrying out an anti-crypto agenda. Even the judiciary has noticed. The 19-page sanctions order and debt box called the SEC's conduct a, quote, gross abuse of power and suggested that, quote, other enforcement cases brought by the commission may be deserving of scrutiny. Last year, the judge overseeing the ripple case, meanwhile, said the SEC lacked a, quote, faithful allegiance to the law. Others picked up on the point that the SEC clearly doesn't have the resources to fight the sheer volume of lawsuits implied by the number of Wells notices being handed out. Rodriguez Sierra, a lawyer who recently left paradigm to rejoin law firm coolly wrote, SEC continues its carpet bombing campaign against crypto, issuing yet another wells to

Starting point is 00:04:58 Robin Hood. You have to wonder whether at this point, Gensar, has bit off a bit more than he can chew. Robin Hood's CLO, Dan Gallagher, is a former SEC commissioner appointed by Obama. A commenter made the point that Gensar doesn't seem to care whether he wins or not. He simply wants to create a chilling effect across the industry. Sierra replied, that's definitely part of the problem. He won't be around when these flimsy cases are finally decided. For him, the incentive is to bring the lawsuit and get the headline today. investor Adam Cochran made a similar point. He wrote, Gensler doesn't plan to win these cases. He plans to get headlines. Either he impresses

Starting point is 00:05:29 Warren enough that under a Biden re-election he gets Treasury Secretary or is kicked out under a Trump win. Gensler doesn't care how it plays out in court. He won't be here. Hello, breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another chance to think about your Bitcoin custody best practices, and of course, to help all the new folks do the same. Ledger is the global platform for securing Bitcoin and other crypto. Ledger combines both hardware wallets and the Ledger Live app to offer the best way to buy, sell, swap, and stake without sacrificing on security or self-custody. Ledger features cutting-edge technology in the form of a certified secure chip and a proprietary

Starting point is 00:06:12 operating system, but also brings ease of use. This makes Ledger a safe and secure way to manage your digital assets without all the stress. Check out the link to the Bitcoin Ledger Nano in notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. Thanks once again to Ledger for supporting the breakdown. Another point being made was that this could be the SEC's strategy in a jurisdictional war with the CFTC over crypto regulation. By launching a huge number of enforcement actions, Gensler could be attempting to brute force his way into the SEC becoming the main crypto regulator. Gary DeWall, senior counsel at Kat and Muccian-Rosomen said, I think its evidence of continued SEC interest in the crypto space and desire to assert its jurisdiction

Starting point is 00:06:52 in areas that, frankly, it's not clear they have. It's important to note that SEC criticism goes well beyond our industry and is extended to Washington over the past year. House GOP lawmakers have been some of the most outspoken on Gensar's overreach. This Wells notice has received particular attention from House Majority Whip Tom Emmer, who coined the term regulation by intimidation to describe this next phase of SEC enforcement. In extended comments, Emmer said, these Wells notices seem to be Gary Gensler's desperate last-ditch attempts to intimidate and antagonize digital asset innovators. Over the last few years, the SEC has completely embarrassed itself at its various court cases, and now Chair Gensler wants to hide behind the threat of lawsuits to an industry

Starting point is 00:07:28 that, frankly, hasn't shied away. The House Financial Services Committee scheduled a hearing entitled SEC enforcement, balancing deterrence with due process. No SEC staff are scheduled to appear. Emmer's Twitter replies were littered with comments demanding action rather than just a never-ending series of hearings. If anything impactful comes out of this hearing, we'll provide coverage in tomorrow's show. Now, at this stage, we don't know the details of the proposed enforcement action. Robin Hood said that the Wells notice relates to broker-dealer and settlement agent registration, but we don't have any further information. We don't even know whether the SEC will actually file a lawsuit, or if this is merely an intimidation tactic as others mentioned. If the

Starting point is 00:08:02 enforcement action goes ahead, we can expect a range of new tokens to be labeled as securities. This could even be the anticipated case that alleges that Ethereum is a security. For now, all we know is that Robin Hood is planning to fight this action, adding to the crowing list of active litigation for the SEC. I think as we reflect on this particular Wells notice, it has really struck a nerve for the crypto industry, frankly more than the others. That might be because, although most folks assumed that regulators would come knocking, it was not widely considered that regulators would go after one of the comparatively conservative crypto exchanges that definitely doesn't push the limits when it comes to token listings. Given how far above and beyond,

Starting point is 00:08:39 Robin Hood tried to go to stay within the unwritten rules, it seems to many like the SEC is attempting to send the message that crypto exchanges are illegal under the current regulatory setup, end-of-story setup, end-of-story, no exceptions. This notice also shines a light on just how untenable the SEC's approach to crypto regulation has become. Prior to this administration, regulatory goals were typically achieved through settlement, especially when it comes to good actors in an industry. Now, we're increasingly seeing crypto firms refusing to play ball, pushing the matter into court and making the SEC prove their case. What has to start to consider, what the legacy of Gensler really is four years in. Certainly, the SEC hasn't moved the ball forward on

Starting point is 00:09:14 crypto regulation. If their goal was to sue the industry into oblivion, they also haven't achieved that. If the goal was to create a chilling effect on the industry, they also haven't done that either. At this point, the industry is more determined than ever to fight for clarity, and builders are still shipping products every single day. Almost every other jurisdiction in the world has made its peace with the fact that crypto exists and will not disappear. The only obvious conclusion, once one accepts that fact, is the point that SEC Commissioner Hester Purse has made repeatedly. In a world where crypto is not going away, it's better to get a regulatory framework in place, rather than push for a soft pseudo-ban that is destined to fail. When all is said and done, all that

Starting point is 00:09:51 Gensler has really seemed to achieve is creating a gigantic pile of lawsuits that he won't be around to see through. There is no ban. Crypto still trades on major platforms, the entire industry is defiant, and it's bigger than ever. How this all plays out, of course, remains to be seen. But clearly, this is a thing we're just going to continue to have to deal with. Indeed, not to be left out, the CFTC have also flagged a new wave of enforcement actions against the industry. During an appearance on Monday, CFTC chair, Rosten Benham said, from my standpoint as a regulator, we're going to probably see in the next six to 24 months another cycle of enforcement actions because of this cycle of asset appreciation and interest by retail investors. He seemed to be referring to bad actors

Starting point is 00:10:27 flocking to the space, adding that, quote, without a regulatory framework, without that transparency without those tools that we typically use as regulators, you're going to see this fraud and manipulation. And while one would hope that regulators would focus on true cases of fraud, it hasn't necessarily been the story in the past. The CFTC, for example, hasn't always been particularly careful in its targeting. Last week, Catherine Kirkpatrick-Bawz, the chief legal officer of CBOE Digital, suggested a much broader crackdown is coming. She said she had heard rumors of an industry sweep on defy derivatives. An industry sweep is when a regulator files mass subpoenas and enforcement actions across a particular sector in order to address a specific

Starting point is 00:11:01 issue. If this is true, it almost certainly wouldn't be limited to frauds and would instead reach much deeper into the defy ecosystem. So, friends, that is more to watch for, but for now, that is going to do it for this episode of The Breakdown. Big thank you to my sponsor for today's show. Check out the Ledger Bitcoin Orange Nano. 5% of sales will go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.

The Breakdown - Why the Robinhood Wells Notice Hits Harder

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