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Robinhood Wells Notice; House Hearing on SEC Enforcement; Mixer Legislation

Robinhood Wells Notice

What happened?

On May 4, Robinhood Crypto (“RHC”) received a Wells notice from the Staff of the Securities and Exchange Commission (“SEC”) indicating that SEC staff will recommend an enforcement action against RHC for alleged securities violations.

“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,” said Robinhood Chief Legal, Compliance and Corporate Affairs Officer Dan Gallagher, who previously served as an SEC commissioner from 2011 to 2015.

Responding to a question about the Robinhood Wells notice on CNBC’s Squawk Box, SEC Chair Gary Gensler said many crypto tokens were securities according to the law, as interpreted by the US Supreme Court, and that the investors were not getting required disclosures about those assets.

What does this mean?

While a Wells notice only serves as an indicator of a potential enforcement action, it adds to the long chain of SEC actions that are designed to punish and deter participation in crypto markets. Like many others, RHC has attempted to work with the SEC to “come in and register,” only to be rewarded with litigation for their efforts. RHC has, in the past, even not offered tokens or products that the SEC has only alleged are securities, demonstrating the chilling effects of the SEC’s aggressive and unlawful approach to the industry.

House Hearing on SEC Enforcement

What happened?

Last Tuesday, the House Financial Services Capital Markets Subcommittee held a hearing titled “SEC Enforcement: Balancing Deterrence with Due Process.” The hearing focused on the SEC’s enforcement approach, and a major part of the hearing focused on the SEC’s anti-crypto enforcement campaign. Several highlights from the hearing are closely related to DeFi.

John Reed Stark, a former SEC staffer and longtime crypto critic, focused his entire testimony on crypto and argued that SEC’s enforcement actions against the industry were completely justified.

Ranking Member Maxine Waters (D-CA), Representative Brad Sherman (D-CA), and Representative Stephen Lynch (D-MA) directed their questions on the SEC’s jurisdiction over digital assets to Stark, who argued that persons who own digital assets are “investing in the efforts of others” and therefore digital assets are securities within SEC’s jurisdiction.

Representative Sherman pointed out that applying the Supreme Court’s Howey test was a peculiar way of determining SEC’s jurisdiction. He suggested that “Congress should vest full authority in the SEC to regulate crypto” to eliminate existing ambiguity. 

On the other hand, Representatives Bill Huizenga (R-MI), Wiley Nickel (D-NC), and Zach Nunn (R-IA) highlighted the problems of the SEC’s enforcement actions against crypto businesses, which has created an unclear and hostile regulatory environment in the U.S. that is driving innovation overseas. Representatives Ann Wagner (R-MO), Huizenga and Nunn also highlighted the SEC’s gross abuse of power in the DEBT Box case. 

Members at the hearing also discussed mixers. Representative Sherman suggested that mixers have no purpose “other than mixing up law enforcement”, without mentioning anything about their use for personal privacy. Representative Casten (D-IL) stated that “until we have studied and have a good audit trail, the presumption should be that these are money laundering channels” and announced that he was introducing a new bill to clamp down on mixers along with Reps. Sherman, Bill Foster (D-IL) and Emanuel Cleaver (D-MO) (discussed below).

What does this mean?

As we argue in our amicus brief in SEC v. Kraken, the SEC's efforts to classify nearly all digital assets as securities under its regulatory scope are flawed, the SEC's varying theories to justify regulatory oversight lack a legal foundation. That includes the SEC's newly revealed view that digital assets become securities based on buyers' expectations influenced by creators' efforts or because they are part of a digital "ecosystem." 

Mixer Legislation

What happened?

Last week, Representatives Brad Sherman (D-CA), Bill Foster (D-IL) and Emanuel Cleaver (D-MO) introduced the Blockchain Integrity Act, which would place a two-year prohibition on financial institutions “handling, using, or transacting with funds routed through digital asset mixers.” The bill defines a “digital asset mixer” as “a website, software, or other service designed to conceal or obfuscate the origin, destination, and counterparties of digital asset transactions.”

The bill would also direct the Treasury Department to study “digital asset mixers, privacy coins, and other anonymity-enhancing technologies” and produce a report on its findings. The issues that would be covered in the report include: percentage of transactions tied to illicit activity; information about legitimate use of digital asset mixers; and the Financial Crimes Enforcement Network (FinCEN), the Office of Foreign Assets Control (OFAC), and enforcement agencies’ capacity to track, prevent, freeze, and confiscate funds that have been processed by digital asset mixers among others.

What does this mean?

First and foremost, the bill’s definition of a “digital asset mixer” is overbroad such that it would include any privacy-enhancing technology on a blockchain. Furthermore, the deployment and use of privacy-enhancing technology is expanding, making it likely that digital assets have passed through what is encompassed by the broad definition of “digital asset mixer.” Because financial institutions would be prohibited from touching a digital asset that had ever been used in a mixer, many would be deterred from involving themselves in the digital asset market at all. This would have downstream effects on DeFi, as centralized exchanges (which are financial institutions) are important on-and-off-ramps into the self-custodial world of DeFi protocols.

The bill's requirement that the Treasury understands crypto's privacy-enhancing technologies, including their legitimate use-cases, is a prudent idea. That being said, the bill’s “ban now, ask questions later” approach is irresponsible, and it should be stripped of its prohibition and passed as a study. It’s not inherently a crime for a person to seek privacy nor is it a crime to provide the tools for doing so.


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