Cryptocurrency exchange Coinbase reached an agreement to pay a $50 million penalty to New York state’s Department of Financial Services to settle accusations that it enabled customers to open accounts without conducting necessary background checks.
The regulator stated that Coinbase violated the New York Banking Law and the New York State Department of Financial Services (DFS) virtual currency, money transmitter, transaction monitoring, and cybersecurity regulations.
As per the settlement, the crypto exchange is also required to invest $50 million into its compliance program over the next two years.
The $100 Settlement
In a statement, Superintendent of Financial Services Adrienne A. Harris said the compliance failures exposed the platform to serious criminal conduct, such as fraud, possible money laundering, suspected child sexual abuse material-related activity, and potential narcotics trafficking, among others.
“Coinbase failed to build and maintain a functional compliance program that could keep pace with its growth. That failure exposed the Coinbase platform to potential criminal activity requiring the Department to take immediate action including the installation of an Independent Monitor.”
The San Francisco-based platform has been licensed to conduct virtual currency operations and money-transmitting business in New York since 2017. However, after NYDFS carried out an examination and enforcement investigation in early 2022, the company’s compliance program failed to keep up with the pace of its business growth.
Coinbase’s Bank Secrecy Act/Anti-Money Laundering program, including its Know Your Customer/Customer Due Diligence, Transaction Monitoring System, and suspicious activity reporting, were deemed inadequate. The New York regulator also said the crypto exchange’s sanctions compliance systems were unsatisfactory for a financial services provider of its “size and complexity.”
Coinbase’s Statement
Coinbase had a brutal year after its trading revenue was slashed by 50% when compared with 2021. Its stock was down by over 84% YTD, currently trading near $38, despite pumping by double digits following the settlement.
The collapse of Sam Bankman-Fried’s crypto empire last year further dragged down the industry and damaged the credibility of the space, with questions being raised on the remaining centralized crypto exchanges.
Paul Grewal, the chief legal officer of Coinbase, said the team recognizes that the industry is at an “inflection point,” with every move made by a prominent player garnering intense scrutiny. The company is reportedly cooperating with an investigation by the NYDFS relating to its historical compliance program.
While acknowledging where Coinbase fell short, Grewal asserted that the company “welcomes opportunities to improve its programs.”
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