On August 1, 2022, the New York Department of Financial Services (“DFS” or the “Department”) secured its first enforcement win against a cryptocurrency platform, Robinhood’s crypto trading arm Robinhood Crypto, LLC.
Robinhood Crypto is a wholly-owned subsidiary of Robinhood Markets, Inc. (RHM). RHM allows users to trade stocks on a commission-free basis through its broker-dealer subsidiary, Robinhood Financial, LLC (RHF). Robinhood Crypto allows RHF customers to trade cryptocurrencies using customers’ U.S. dollar funds.
After conducting a routine safety and soundness examination in 2020, DFS found “serious deficiencies . . . across multiple areas” of RHC’s compliance function. DFS’s subsequent enforcement investigation turned up violations of DFS rules in two key areas: anti-money laundering controls and transaction monitoring; and cybersecurity of customer information.
In particular, DFS took issue with Robinhood Crypto’s reliance on its parent’s and affiliate’s compliance programs, which themselves were not adequate under DFS rules or tailored to “the particular risks applicable” to cryptocurrency trading platforms. DFS also noted Robinhood Crypto’s lack of cooperation with the Department, including a failure to disclose parallel investigations by other federal and state regulators of Robinhood Crypto’s affiliate. Other violations stemmed from inadequate staffing, leading to a backlog for processing flagged transactions.
This was not Robinhood’s first encounter with regulators. In June 2021, FINRA fined Robinhood $70 million, which includes $12.6 million in restitution to thousands of customers and a $57 million penalty, the largest in the regulator’s history. According to FINRA, Robinhood communicated false and misleading information to millions of its customers related to whether customers could place trades on margin, how much cash was in their accounts, how much buying power they had, the risk of loss customers faced in certain transactions, and whether customers faced margin calls. FINRA also found that Robinhood failed to properly supervise its technology, causing it to experience a critical systems failures and major system outages.
Robinhood’s story shows the unique compliance challenges faced by fast-growing companies in highly regulated spaces. Rapid growth comes with an increased compliance burden, especially for companies in the cryptocurrency space. With this record fine, DFS has fired a shot across the bow for crypto trading platforms, signaling that it’s no longer content to play catchup.