Robinhood warns crypto, payment for order flow regulation poses risk to business model

PFOF and transaction rebates from cryptocurrency trading accounted for 79% of revenue in 2nd quarter

Robinhood has sounded the alarm to investors about potential risks to its business model related to increased regulatory scrutiny of cryptocurrencies and payment for order flow (PFOF), a payment arrangement with market makers which allows trading platforms to offer low-commission or commission-free trading

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According to Robinhood, payment for order flow and transaction rebates from cryptocurrency trading accounted for 79% of the company's total revenue in the second quarter, with PFOF making up 38% and cryptocurrencies making up 41%.

"Regulation of the cryptocurrency industry continues to evolve and is subject to change. Moreover, securities and commodities laws and regulations and other bodies of laws can apply to certain cryptocurrency businesses,"  the platform said in an amended S-1 filing on Friday. 

"These laws and regulations are complex and our interpretations of them may be subject to challenge by the relevant regulators. Future regulatory developments are impossible to predict with certainty. Changes in laws and regulations, or our failure to comply with them, may negatively impact our ability to allow customers to buy, hold and sell cryptocurrencies with us in the future and may significantly and adversely affect our business."

In addition, the company cited a June agenda from the Securities and Exchange Commission, which noted that the agency would be considering proposing rules in the next year to "modernize equity market structure," including possible new rules on payment for order flow, and an August interview with SEC chairman Gary Gensler in which he commented that a full ban of PFOF was "on the table."

"Any new or heightened PFOF regulation may result in increased compliance costs and otherwise may materially decrease our transaction-based revenue, and may also make it more difficult for us to expand our platform in certain jurisdictions," the company said.

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Robinhood's warning comes as the company is seeking approval on a previously announced shareholder stock sale of up to 97.9 million shares. The SEC notified Robinhood in August that it is reviewing the share sales. No sales can be made until after the agency completes their review and declares it effective. 

Ticker Security Last Change Change %
HOOD ROBINHOOD MARKETS, INC. 39.01 -0.58 -1.47%

Bitcoin, the world's largest cryptocurrency, is trading around $57,400 per coin as of the time of publication, according to real-time price tracking by CoinDesk, while rivals Ethereum and Dogecoin are trading at around $3,500 and 23 cents per coin respectively.