Robinhood's SEC Battle: Likely Win with Conservative Crypto Listings

Key Takeaway

• KBW predicts Robinhood (HOOD) will likely win against the SEC, citing its conservative crypto listings approach with only 15 cryptocurrencies.
• Crypto trading accounts for 12% of HOOD's revenue; ether (ETH) being classified as a security by the SEC poses the biggest revenue risk.
• Shareholders may not see case resolution until late 2025, drawing parallels with the ongoing SEC case against Coinbase (COIN).

SEC Issues Wells Notice to Robinhood

Robinhood Markets Inc. has been served a Wells notice by the U.S. Securities and Exchange Commission (SEC), indicating potential legal action against the company's cryptocurrency operations. This move by the SEC, as detailed in a research report by KBW, comes as a surprise given Robinhood's conservative approach to digital asset listings, offering only fifteen cryptocurrencies compared to peers who list over two hundred. The SEC's preliminary determination to recommend enforcement action could lead to civil litigation, monetary penalties, and restrictions on Robinhood's business activities, signaling a continuation of the U.S. regulatory crackdown on digital assets.

Robinhood's Conservative Crypto Strategy

Despite the looming threat from the SEC, Robinhood's cautious strategy in cryptocurrency offerings has been highlighted. The company, which generated $135 million from cryptocurrency trading out of its $785 million in transaction-based revenues last year, has avoided listing certain tokens and providing products like lending or staking to comply with the SEC's regulatory stance. Dan Gallagher, Robinhood’s chief legal, compliance, and corporate affairs officer, expressed disappointment over the SEC's decision but remains confident in the legality of the assets listed on Robinhood's platform. This conservative approach might position Robinhood favorably in any potential legal battles, with analysts from KBW suggesting a higher likelihood for Robinhood to prevail against the SEC compared to its U.S. competitors.

Potential Impact on Robinhood's Revenue

The SEC's focus could potentially target a subset of digital assets on Robinhood's platform, with ether (ETH) being a significant concern as it constitutes approximately 25% of Robinhood's crypto assets/trading. Such a move could pose a worst-case scenario from a revenue-at-risk perspective for Robinhood. However, the company's stock price showed resilience, trading 1.3% higher early Tuesday at around $18, and has seen a 47% increase since the start of 2024. Robinhood is set to report its first-quarter financial results soon, amidst this regulatory uncertainty.

Street Views

• Kyle Voigt, KBW (Neutral on Robinhood):

  "We expect no change to HOOD’s current U.S. crypto operations or asset listings - and expect the SEC to bring forward a suit within the coming months... Our preliminary view is that HOOD would likely fight the SEC in court and has a higher likelihood to prevail than most U.S. competitors (if put in similar situations) given HOOD’s stricter listings standards." "The worst case scenario from a revenue-at-risk perspective is if the SEC chooses to move forward with categorizing ether (ETH) as a security - as this likely makes up ~25% of HOOD’s crypto assets/trading."