The American financial service company Robinhood faces an SEC investigation over the crypto business after being subpoenaed by the Securities and Exchange Commission last year.
The company that created the well-known trading app, Robinhood Markets Inc., announced today that the Securities and Exchange Commission had sent a subpoena to the company last December.
The company made the Investigation public in its most recent 10-K filing with the SEC. The company includes a subpoena from the SEC in it that questions Robinhood’s supported cryptocurrencies, custody of cryptocurrencies, and platform operations, among the several disclosures of potential hazards to its business.
In the filings, the company wanted by the SEC or court that it could order Robinhood to stop trading any cryptocurrencies it supports if they are found to be securities. Such an activity might bring about regulatory fines, client responsibilities, and court or administrative punishments.
Currently, Robinhood supports 18 cryptocurrencies on its trading platform, including Bitcoin, Ethereum, and Dogecoin. To get started with digital assets, investors can invest as little as $1.
When a case is under investigation, a subpoena orders the subject to show up in court to testify or provide evidence. According to Robinhood, similar subpoena demands addressing its trading platform, asset custody for customers, client disclosures, and currency listing were made by the California Attorney General’s office. It also stated that it was aiding the inquiry in California.
Robinhood’s spokesperson said they have nothing more to say other than what is in the filing. Following the filing on Monday, shares of Robinhood fell by 0.5% in after-hours trade.
During the COVID-19 pandemic, the company saw a period of hyper-expansion that was made possible by cheap interest rates, stimulus checks, and the simplicity of its app. These features enabled regular investors to purchase and trade both equities and cryptocurrencies like Bitcoin.
Once the massive digital currency exchange FTX collapsed last year, the SEC launched a string of severe actions against the cryptocurrency market.
Earlier this month, the well-known brokerage stated that the Securities and Exchange Commission’s recommendations will take them back to the time before zero-commission trading when stock investors had to pay fees to acquire and sell them.
The two firm executives spoke about the SEC’s proposal to outlaw Payments for Order Flow earlier this month, in a substantial response to the plans since they were announced in December. It is a technique where electronic trading companies called wholesalers pay brokers a portion of their profits carrying out the order of investors.
Robinhood focuses a significant portion of its business model on paying for order flow. The practice is opposed by some who claim it creates a conflict of interest for brokers, including SEC Chairman Gary Gensler.
But PFOF enabled businesses like Robinhood to generate revenue without levying commissions, and it paved the way for zero-commission trading, which during the pandemic attracted millions of new participants to the stock market.
Robinhood relies significantly on PFOF even though it has started to rely increasingly on other revenue sources, like earning interest on cash balances. The business expects that routing stocks and options orders will account for 43% of its overall net revenue until the third quarter of 2022.
The SEC claims that its suggestions are designed to provide investors with a better deal on trades. Its main strategy is to have retail brokerages forward a large portion of their orders of clients to auctions, where high-speed traders and other companies can bid to execute each transaction.
To give investors a better deal, it is intended to eliminate competitive factors.
According to the data from last year, the top 12 retail brokers earned $3.1 billion in PFOF in 2017. Although there are nuclear limitations on the practice in the SEC’s proposals, some of the ideas could impede the flow of payments.
Also Read:- Fast-Food Giant Subway $8B Sale; Clamps Down On Franchisees
For instance, the availability of an auction restricts the number of discounts that the auction operator may offer to brokers. The SEC is proposing to establish this restriction at 5 cents per 100 shares, which would essentially restrict PFOF to orders placed during auctions.
According to regulatory documents, Robinhood paid 25 to 44 cents per 100 shares of S&P 500 equities in December to route market orders to wholesalers.
According to reports, the best execution offer applies to both options and stock, unlike an auction mechanism. This may have an impact on the lucrative PFOF options market, which generates roughly twice the amount of brokerage revenue as PFOF.
The rule, according to the SEC, may hurt brokers. The government claims that new criteria might raise the revenues of major brokers and force some small brokers out of the market in a study that goes along with the proposal.
The chairman of the SEC, Gary Gensler, has made it clear that he intends to take action against all coins and tokens that he considers to be unregistered securities, which essentially includes everything in the cryptocurrency market aside from Bitcoin.
Genesis and Gemini were charged by the commission in January for marketing unregistered securities. Moreover, it fined the US cryptocurrency exchange Kraken $30 million earlier this month for breaking security rules.
Read More:- California 529 Plan: Everything To Know About!