Coinbase to pay US$100m after ‘significant failures’ raised criminal activity risk

Investing

Coinbase, one of the nation’s top cryptocurrency exchanges by trading volume, has agreed to pay $100 million as part of a settlement with New York regulators who allege the firm violated anti-money-laundering laws by allowing users to open accounts without conducting sufficient background checks—marking the latest instance of heightened scrutiny facing the nascent cryptocurrency industry.

Photo illustration by Chesnot/Getty Images

As part of the settlement, Coinbase will pay a $50 million fine to the state of New York for “significant failures” in its compliance program that violated banking laws and state regulations, the New York State Department of Financial Services announced Wednesday morning.

Coinbase, which posted a loss of $545 million in its most recent quarter, also agreed to invest an additional $50 million to help bolster compliance over the next two years with a plan approved by state regulators, the department said.

In an enforcement action, the department said Coinbase’s compliance system “failed to keep up with the dramatic and unexpected growth” of the exchange’s business as the prices of cryptocurrencies like bitcoin more than doubled in 2021.

As a result, the exchange’s compliance system became “overwhelmed” and amassed a substantial backlog of unreviewed transaction monitoring alerts that exposed the platform to risks of exploitation by criminals and bad actors.

The firm also treated customer sign-up requirements—meant to prevent money laundering—as “a simple check-the-box exercise” and failed to conduct appropriate due diligence, regulators said, alleging Coinbase “did the bare minimum” to verify customer information and overlooked information that was “on its face clearly inaccurate.”

In a statement, Coinbase chief legal officer Paul Grewal said the firm has taken “substantial measures to address these historical shortcomings,” including partnering with regulators when it comes to compliance; the stock rose more than 3% Wednesday morning but has collapsed 86% in the past year—more than twice the tech-heavy Nasdaq’s 33% decline over the same period.

New York regulators outlined multiple instances in which the safeguard risks resulted in suspicious or unlawful conduct facilitated through Coinbase’s platform. In one instance, New York regulators allege Coinbase failed to discover that a former customer was criminally charged in the 1990s with crimes related to child sexual abuse material. For more than two years, the customer engaged in suspicious transactions potentially associated with illicit activity. Coinbase, which has cooperated with law enforcement on the matter, eventually detected the activity, reported it and closed the accounts.

The cryptocurrency industry has been shrouded in uncertainty since the sudden collapse of major exchange FTX in November. The sector had already been reeling from a sell-off that pushed crypto prices down some 75% from all-time highs one year earlier, and now policymakers are doubling down on the need for increased regulation. “The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector,” federal regulators including the Federal Reserve said in a joint statement on Tuesday, outlining risks including fraud and scams among cryptocurrency players, contagion risk and risk management practices.

In August, New York regulators fined Robinhood’s crypto division $30 million for “significant shortcomings” in the firm’s compliance program.

This article was first published on forbes.com All $ values USD

Further Reading

New FTX CEO Says Former Billionaire Bankman-Fried Led ‘Unprecedented’ Failure—‘Incessant’ Tweets Undermine Bankruptcy Case (Forbes)

Robinhood’s Crypto Arm Hit With $30 Million Fine By State Regulator (Forbes)