In a recent development that has sent shock waves through the crypto industry, NYDFS, or the New York State Department of Financial Services, slapped Robinhood’s crypto trading unit with a $30 million fine. This fine will make NYDFS the first major financial regulator to take action in the crypto space. What led to such an extreme step to be taken against the online trading app? And what will be the next steps of the brokerage? We sought the help of trading expert Crypto Sensei to answer all pressing questions and weigh in on the seriousness of the situation, starting right with how it all happened and what investors can expect.
The $30 million fine is based on the allegations that Robinhood failed to invest enough resources to maintain a culture of compliance. NYDFS further alleges that Robinhood used a manual system to monitor transactions, despite averaging more than 100,000 transactions a day. Crypto Sensei explains that for a company of that size, not having automated systems in place is unheard of. Founded in 2013, Robinhood should have replaced its manual system to review transactions with automated transaction monitoring, especially as the company continued to grow over the years.
The department’s first-ever crypto enforcement action against the stock trading and investing app was the result of numerous violations related to cyber security and anti-money laundering guidelines. NYDFS said it found significant failures through a supervisory exam and through an enforcement investigation of Robinhood.
The regulatory body continued by saying that the brokerage also had critical failures in its cybersecurity program. The Wall Street Journal reports the failures tied to shortcomings in the company’s management and oversight of its compliance programs. Further, the agency added that the staff of Robinhood failed to minimize damages due to major oversights. These include failures to foster and maintain a culture of compliance and to allocate adequate resources to the programs.
Crypto Sensei explains that the fine came after an independent consultant reviewed the company’s compliance with the laws and regulations governing crypto trading. The regulators noted that the brokerage lacked sufficient staff members and resources to be able to efficiently take care of the rapidly scaling business.
In addition to the $30 million penalty, the third-largest crypto exchange in the US will also be required to retain an independent consultant to evaluate the company’s future compliance, to which Robinhood has given its consent.
Crypto Sensei adds that this isn’t the first time that Robinhood has found itself in the middle of a legal battle. Just last year, the Financial Industry Regulatory Authority, or FINRA, imposed the largest ever fine of $70 million on the online stock trading app. This was because of a series of failures that caused serious damages to millions of customers of Robinhood, said the securities industry’s self-regulator. Not only that, but Robinhood also approved ineligible traders for risky strategies and didn’t supervise technology that locked millions out of trading.
Despite these regular penalties, Robinhood’s shares haven’t seen much of a drop, and the company continues to enjoy an enviable place in the crypto market, says Crypto Sensei.