Robinhood Crypto Receives SEC Notice, Expects Q1 Growth

Robinhood Markets disclosed that its cryptocurrency trading division has received a Wells notice from the SEC regarding the digital tokens traded on its platform.

The notice, issued on May 4, signals potential enforcement actions from the regulatory body but does not imply any immediate wrongdoing.

The SEC’s Wells notice is a preliminary indication that the agency might pursue legal actions against Robinhood Crypto. These measures could include a cease-and-desist order, a public administrative proceeding, or an injunction. The SEC could also seek to limit or revoke Robinhood’s cryptocurrency operations and impose penalties, including disgorgement of profits, prejudgment interest, and civil fines.

The SEC has maintained a rigorous approach to regulating digital currencies, particularly in the aftermath of the collapse of the FTX cryptocurrency exchange. The agency insists that many crypto tokens qualify as securities and should be subject to registration requirements. This scrutiny has faced criticism from some cryptocurrency businesses, accusing the SEC of overstepping its regulatory reach.

Dan Gallagher, Robinhood’s Chief Legal, Compliance, and Corporate Affairs Officer, expressed confidence in the legitimacy of the assets listed on the platform, emphasizing that they do not qualify as securities. He also mentioned Robinhood’s eagerness to engage with the SEC on the matter, voicing concerns that any potential case against the company lacks substance.

Robinhood Financial Performance

Despite the regulatory scrutiny, Robinhood is expected to announce its highest quarterly revenue in nearly three years due to a rebound in equity and crypto trading. First-quarter earnings are expected to reach six cents per share, an improvement over last year’s 57 cents per share loss. Revenue is projected to rise by 24.5% to $549 million.

Robinhood’s cryptocurrency trading revenue is also anticipated to more than double to $80 million compared to the previous year, contributing significantly to the company’s overall financial performance.

Market Reaction and Stock Performance

Following the announcement of the SEC’s notice, Robinhood’s shares fell by up to 7% in premarket trading on Monday but recovered slightly after the market opened, closing the day down by 1%. Despite the dip, Robinhood stock remains above the 50-day moving average and has surged by over 39% this year, buoyed by rising Bitcoin prices.

CEO Vlad Tenev addressed the notice and regulatory scrutiny, emphasizing the company’s commitment to defending its crypto business and seeking regulatory clarity in the U.S. He stated that the regulatory pressure on the industry stifles innovation and negatively affects consumers.

Retail Investor Activity and Broader Trends

Robinhood saw a resurgence in retail investor activity this quarter, with daily active users increasing by 65% in March compared to the same period last year and new mobile app downloads rising by 94%. This growth has been propelled by a steady rebound in equity markets and increased interest in cryptocurrencies.

The platform has also benefited from higher net interest revenue, which is forecasted to increase by 24% to $258.24 billion in the first quarter. This figure is expected to drive Robinhood’s top-line revenue alongside growth in equity, options, and crypto trading volumes.

Analysts have a mixed outlook on Robinhood stock, with the average recommendation from 17 brokerages currently being “hold.” However, the median price target is set at $19, up 65% from three months ago, indicating positive sentiment among some market observers.