The cryptocurrency arm of the zero-free trading giant Robinhood has agreed to pay $3.9 million to settle allegations by California's Attorney General that it violated state commodities law by prohibiting customers from withdrawing cryptocurrency from their accounts between 2018 and 2022.

Robinhood Crypto Settles with California for $3.9 Million

The settlement, announced yesterday (Wednesday) by California Attorney General Rob Bonta, marks the first public action by the state's Department of Justice against a cryptocurrency company.

According to the Attorney General's office, Robinhood sold commodities contracts in violation of California law by allowing customers to purchase cryptocurrencies without actually delivering the assets. During the period in question, customers were unable to withdraw their crypto and had to sell them back to Robinhood to exit the platform.

“Our investigation and settlement with Robinhood should send a strong message: Whether you're a brick-and-mortar store or a cryptocurrency company, you must adhere to California's consumer and investor protection laws,” said Attorney General Bonta. “I am dedicated to using all the tools available to my office to protect California consumers in the face of advancing technology in the marketplace.”

The investigation also found that Robinhood misled customers about its trading practices, including claims that it would connect to multiple trading venues to ensure competitive prices. Additionally, the company failed to disclose instances where it arranged for trading venues to hold customer assets for extended periods.

Under the terms of the settlement, Robinhood must allow customers to withdraw crypto assets to their own wallets and update its disclosures regarding trading and custody practices. The company did not admit or deny wrongdoing as part of the agreement.

“We are pleased to put this matter behind us,” added Lucas Moskowitz, Robinhood Markets' General Counsel. “The settlement fully resolves the Attorney General's concerns related to historical practices, and we look forward to continuing to make crypto more accessible and affordable to everyone.”

Robinhood Crypto’s Additional Regulatory Problems

The settlement comes as Robinhood faces separate scrutiny from the US Securities and Exchange Commission (SEC), which indicated in May that it is preparing to file suit over alleged violations of federal securities laws.

“On May 4, 2024, Robinhood Crypto (RHC) received a 'Wells Notice' from the Staff of the SEC stating that the Staff has advised RHC that it made a 'preliminary determination' to recommend that the SEC file an enforcement action against RHC alleging violations of Sections 15(a) and 17A of the Securities Exchange Act of 1934, as amended,” Robinhood mentioned in a filing with the regulator.

The SEC's recent measures are in line with actions taken against other cryptocurrency exchanges like Coinbase and Binance. This reflects the heightened scrutiny that platforms in the digital asset sector are experiencing, as well as the persistent legal confrontations between regulatory bodies and industry stakeholders.