Turning tables: fine for Robinhood as regulators close in on crypto

As cryptocurrency becomes increasingly popular, there is even more opportunity for consumers to become victims of fraud, loss and theft in this broadly unregulated industry. We’ve seen steps towards regulated crypto assets from the US, UK and Europe this year, aiming to protect customer rights and pave the way for a less cryptic and more transparent way of investing.

With one in five Americans having used or traded digital assets, it’s safe to say that crypto has taken the main stage in the US financial sector. As more users flood to invest, hacks and abuses have become more common on trading platforms and have led to billions of dollars in losses. The industry greatly lacks transparency and fairness and now many are calling for regulations to hold them to account.

Deciding how exactly to regulate cryptocurrency assets has proven to be difficult. Congress has put forward bills that would give regulatory responsibility to the Commodities Futures Trading Commission (CFTC), the SEC or even a whole new regulator.

New cryptocurrency laws in the US

With this need to regulate the crypto market, U.S. Senators Debbie Stabenow (Chairwoman of the Senate Committee on Agriculture, Nutrition and Forestry), John Boozman (Ranking Member), along with Senators Cory Booker and John Thune introduced the Digital Commodities Consumer Protection Act of 2022.

The crypto industry has, until now, been controlled by fragmented state-level regulations which aren’t effective in protecting consumers from fraud. Senator Boozman mentions that “relying on state regulation does not ensure that rules and regulations work for all stakeholders.” The new Act provides the CFTC with the authority to regulate digital commodities and close “regulatory gaps” so that “these markets operate under straightforward rules that protect customers and keep our financial system safe.”  

What does the Digital Commodities Consumer Protection Act mean for cryptocurrency?

• The CFTC is now able to regulate the trading of digital commodities with consistent, rigorous rules.
  
  
• It enforces accountability by holding digital commodity platforms to the same standards as traditional financial institutions.
  
  
• It requires all digital commodity platforms to register with the CFTC, the bill sets a national standard and aims to increase coordination with international regulators – including trading facilities, brokers, dealers, and custodians. 
  
  
• Platforms must prohibit abusive trading practices, eradicate or reveal conflicts of interest, have sufficient financial resources in place, robust cybersecurity programs, protect customer assets and report any suspicious transactions. 
  
  
• For greater accountability, digital commodities must follow advertising standards and be upfront regarding any risks of using digital commodities. 
  
  
• With this new visibility into the market, the CFTC will respond to any upcoming risks and protect consumers as well as impose user fees to fund its movement to better protect customers in this industry. 

Robinhood fined $30 million

Just last week, Robinhood Crypto (RHC) was fined $30 million by the New York State Department (NYDFS) for Bank Secrecy Act and anti-money laundering (BSA/AML) violations and issues with cybersecurity compliance programs. Robinhood is a cryptocurrency platform that offers currencies like Bitcoin, Ethereum, Bitcoin Cash and Dogecoin; you can buy and sell within their app and won’t need to pay fees when trading.

Key issues that led to Robinhood’s fine

• Its cybersecurity program didn’t address the risks of a potential breach sufficiently and wasn’t in full compliance with NYDFS’s cybersecurity regulations, evoking the company’s poor management and oversight of compliance programs. 
• Robinhood failed in adhering to critical customer and reporting requirements. 
• It had an inadequate number of staff and scarce resources in dealing with risks.  
• The company failed to transition from a manual transaction monitoring system which was unfit for the company’s size. 

Consequently, Robinhood has been instructed to hire an independent consultant for 18 months to review its BSA/AML and cybersecurity programs. This isn’t the first fine Robinhood has been handed, the company was fined in 2019, 2020 and 2021 as a consequence of violating BSA/AML regulations, and cybersecurity regulations as well as misleading customers about how it makes money.

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CUBE comment

As Robinhood Crypto grew in size, it failed to invest in satisfactory resources and lacked attention to maintaining a culture of compliance. This led to the violations of the New York State’s anti-money laundering and cybersecurity regulations which all virtual currency companies in New York must follow. This isn’t the first time we’ve seen a tech-focussed, emerging organisation fall into regulatory hot water for focussing too much on technology for profit, and not enough on technology for compliance.

It is estimated that more than 300 million individuals use cryptocurrency around the world which provides 300 million reasons why it should be regulated. We need to ensure that consumers don’t become victims of financial systems and guarantee the safety and soundness of institutions whilst reaping the benefits of utilising crypto. With a more transparent way of investing, cryptocurrency can be a great opportunity for economic success – it’s a big market.  

Alongside the EU and the US, the UK is taking steps toward welcoming crypto. The All Party Parliamentary Group (APPG) for the UK’s crypto and digital assets sector is investigating the UK’s crypto industry. Areas that will be discussed include customer protection, financial crime, the potential of central bank digital currencies and the need for regulation.

The inquiry will also focus on the UK’s approach to regulation currently including the Bank of England, the FCA and the ASA and the Government’s plans to make the UK the global home of crypto investment. 

Robinhood’s failure, paired with the action we’ve seen from both US and UK regulators in the last week is a classic example of reactive regulation – leading to reactive compliance. If regulators and financial organisations had kept ahead of emerging risks, the story would be entirely different.

With more and more countries embracing crypto with open arms, looking ahead there will be more regulations in place. More regulations mean better oversight but mean more work for the compliance team. To best tackle this, companies must stay up to date with any new rules, map out how to best implement these and action the changes.

Keep ahead of any new changes with CUBE and never miss a regulation. We provide global regulatory intelligence, delivering real-time regulations relevant to your business. Whether you’re a large financial institution or a smaller organisation, our regulatory solution can be tailored to your company’s requirements. 

Are you prepared to manage regulatory change for cryptocurreny?