Robinhood/cryptos: pocket rocket may curve round regulators

Newsletter: Unhedged

Robinhood wants to show investors that it still has plenty of growth arrows left in its quiver. It makes most of its revenues by selling equity order flows to brokers, a controversial practice. The US fintech is therefore seeking deeper exposure to cryptocurrencies.

The popular trading app is planning to add crypto wallets on its platform. At the moment, Robinhood customers can buy and sell digital currencies such as dogecoin and Bitcoin. But they cannot take their holdings off the platform or receive them from elsewhere.

A crypto wallet would allow users to send and receive digital tokens to and from other wallet addresses without having to convert them into dollars first.

The move could help the group lure customers from established crypto exchanges like Coinbase. But it is doing so amid growing official hostility to digital currencies. Coinbase was this week forced to drop a new crypto lending product after regulators threatened legal action. The business has shed more than a quarter of its market value since going public in April.

Still, Robinhood’s interest in crypto is understandable. Fees from routing customers’ crypto trades to high-speed trading firms are now nearly five times bigger than those earned from routing stock trades. They totalled $233m, or 41 per cent of net revenue, during the second quarter. That is up from $5.3m from the same period a year ago. About 60 per cent of funded accounts traded cryptocurrency during the period. Crypto assets under custody ballooned to $23bn at the end of June, from just $1bn a year ago.

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Robinhood is engaging in a kind of regulatory arbitrage. US watchdogs are scrutinising payment for equity order flows. But the regulatory status of cryptos is unclear. Watchdogs may not intervene against sales of digital token order flows — which would reduce the value of add-on wallets — until their crypto powers have been extended.

Robinhood’s latest business initiative therefore highlights a bigger issue. Cryptos are advancing step by baby step into the financial mainstream. US regulation is stumbling along haplessly in their wake.

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