SEC sends Robinhood a Wells notice, BTC-e’s Vinnik cops to money laundering

Getting your Trinity Audio player ready...

U.S. authorities are showing no signs of letting-up in their efforts to bring civil and criminal charges against ‘crypto’ operators, regardless of how much time has elapsed since the wrongdoing was committed.

On May 4, the ‘crypto’ division of online brokerage Robinhood (NASDAQ: HOOD) filed an 8-K form indicating that it had received a Wells notice from the U.S. Securities and Exchange Commission (SEC). A Wells notice indicates that the SEC has concluded an investigation, and an enforcement action is being prepared.

The SEC’s notice involved Robinhood Crypto’s (RHC) alleged violations of Sections 15(a) and 17A of the Securities Exchange Act of 1934. The SEC issued a subpoena in February 2023 that stated an interest in “among other topics, RHC’s cryptocurrency listings, custody of cryptocurrencies, and platform operations.”

On May 6, Robinhood’s Chief Legal, Compliance and Corporate Affairs Officer, Dan Gallagher, issued a statement saying, “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.”

Gallagher added that Robinhood “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 Robinhood Crypto would be on both the facts and the law.”

Robinhood’s defense appears to be based on its ‘voluntary’ removal of certain tokens—Cardano (ADA), Polygon (MATIC), and Solana (SOL)—from its platform a year ago. These tokens were among those specifically cited as unregistered securities in the SEC’s actions against the digital asset exchanges Binance and Coinbase (NASDAQ: COIN). Both of those civil suits remain ongoing concerns.

The SEC may also have an issue with Robinhood’s wallet program, which expanded into decentralized finance territory last August to allow users to perform ETH swaps. In April, the SEC issued a Wells notice to Uniswap Labs, reportedly due to the perceived lack of ‘decentralization’ in Uniswap’s decentralized exchange and the belief that Uniswap’s native UNI token—which is available to trade on RHC—is an unregistered security.

However, the SEC has also made recent moves that suggest it’s preparing to declare Ethereum’s native ETH token an unregistered security. ETH is one of the main token options on RHC, along with BTC, DOGE, SHIB, AVAX, and defi tokens such as UNI.

For now, at least, Robinhood’s stock doesn’t appear to be suffering all that much from the SEC news, possibly because ‘crypto’ is a relatively small part of its operations rather than the sole focus of companies like Binance, Coinbase, and Uniswap. RHC also doesn’t offer staking or lending programs like Coinbase.

Robinhood is scheduled to report its Q1 financials on May 8, and the analyst call may reveal further details regarding the company’s SEC issues. In the meantime, the reaction from ‘crypto’ companies and their supporters has predictably been ‘regulation by enforcement’ complaints.

Rep. Tom Emmer (R-MN) opted for “regulation by intimidation,” but tomato, tomahto. Emmer, who once publicly praised FTX’s Sam Bankman-Fried as a fine, upstanding poster boy for crypto compliance, also slammed SEC Chairman Gary Gensler, calling the Wells notices Gensler’s “desperate, last-ditch attempts to intimidate and antagonize digital asset innovators.”

Emmer will be able to engage in some more performative yelling about Gensler on May 7, as the House of Representatives’ Financial Services Committee is holding a hearing on the SEC titled SEC Enforcement: Balancing Deterrence with Due Process.

If I had a hammer…

Emmer’s views ignore the fact that the SEC is far from the only U.S. federal agency taking action against crypto companies. The Commodity Futures Trading Commission (CFTC) issued a report last October that revealed nearly half of its FY23 enforcement actions involved “conduct related to digital asset commodities.”

On May 6, CFTC chairman Rostin Behnam sat for an interview at the Milken Institute’s 2024 Global Conference. Behnam predicted that the digital asset sector is “going to probably see, in the next 6-18 months, or 6-24 months, another cycle of enforcement actions because of this cycle of asset appreciation and interest by retail investors.”

Behnam said these enforcement actions resulted from what he claimed was the lack of a proper regulatory framework for digital assets in America. Behnam warned that the resulting lack of “transparency” meant “you’re going to continue to see this fraud and manipulation” that has plagued the sector from the start.

The SEC and CFTC differ on this front, with the SEC party line being that existing securities laws apply to most digital assets, given the ease with which they meet the conditions of the Howey test. However, the two bodies appear to have one mind on this fact: until Congress states otherwise, the authorities are going to enforce the laws on the books, regardless of whether the illegality in question is ongoing or historical.

This has come as a real blow to the widely held school of thought amongst ‘crypto bros’ that because these companies got away with something illegal for a time, this somehow immunized them from any retroactive investigation. But that’s not really how things work.

BTC-egregious

Consider the return to the media spotlight of Alexander Vinnik, former operator of the defunct BTC-e exchange that shut down in 2017 following Vinnik’s arrest in Greece.

A multi-country extradition squabble ensued, with the U.S. and France seeking to get their hands on Vinnik to charge him with money laundering and fraud. Meanwhile, Russia was making demands to repatriate their native son, presumably so he could help them evade Western economic sanctions.

But the U.S. ultimately prevailed in that fight, and Vinnik wasn’t so blind that he couldn’t read the writing on the wall. On May 3, the U.S. Department of Justice (DOJ) announced that Vinnik had pleaded guilty to conspiracy to commit money laundering.

Despite a large number of U.S. users, BTC-e never obtained a money services business license, nor did it ever implement any anti-money laundering or ‘know your customer’ processes and policies. In fact, BTC-e “collected virtually no customer data at all, which made the exchange attractive to those who desired to conceal criminal proceeds from law enforcement.”

The DOJ said BTC-e “received criminal proceeds of numerous computer intrusions and hacking incidents, ransomware attacks, identity theft schemes, corrupt public officials, and narcotics distribution rings. Vinnik operated BTC-e with the intent to promote these unlawful activities and was responsible for a loss amount of at least $121 million.”

Deputy Attorney General Lisa Monaco said Vinnik’s plea “shows how the Justice Department, working with international partners, reaches across the globe to combat crypto crime.”

Sweating bullets

Vinnik saw the light only after all his other better options were exhausted, a path blazed by many a ‘crypto’ criminal before him. But we suspect a wave of proactive guilty pleas may be in the pipeline, if for no other reason than that those who know they’re guilty also know they may not have much time left to cut a deal.

Consider Roger Ver, one of the original ‘crypto bros’ who was arrested in Spain late last month on charges of tax evasion and mail fraud. Ver stands accused of depriving Uncle Sam of “at least” $48 million he owed when he surrendered his U.S. citizenship in 2014. Given the time that elapsed between his alleged crimes and his arrest, Ver likely thought he’d gotten off scot-free. He thought wrong.

Given Ver’s longstanding role as a crypto advocate, his close ties to other crypto OGs, and his lengthy list of crypto investments, countless individuals/entities are now wondering what secrets Ver might divulge to save his own hide.

Perhaps that fear convinces some to cop to their own malfeasance in the hopes of earning the kind of brownie points Binance founder Changpeng ‘CZ’ Zhao appears to have cashed in last month when he walked away with a mere four-month sentence for his crimes. 

During CZ’s sentencing hearing, CZ’s attorneys twice referenced a “compelling factor” that justified a lenient sentence. The sentencing memo that CZ’s legal team filed ahead of the hearing included a four-page section that was completely redacted. A second redacted section is followed by the claim that Binance “has been instrumental in counteracting other major high-risk entities” [emphasis added].

Given the heavily trafficked intersection of crypto and crime, ‘major high-risk entities’ could reference any number of companies, the senior executives of which are likely sweating bullets. Time to cut your losses, boys.

Watch: Teranode & the Web3 world with edge-to-edge electronic value system