Coinbase has reached a $100 million settlement with the New York State Department of Financial Services (DFS), which accused it of breaking virtual currency, money transmission, transaction monitoring, and cybersecurity standards. “These deficiencies placed the Coinbase platform open to severe criminal behaviour, including instances of fraud, probable money laundering, suspected child sexual abuse material-related activities, and potential narcotics trafficking,” according to the FBI. The corporation will pay a $50 million fine to the state as well as spend $50 million to fix the concerns raised by the regulator and comply with a DFS-approved plan.
According to the government, Coinbase’s policies on due diligence, transaction monitoring, and sanctions compliance (among other things) were “inadequate for a financial services provider of Coinbase’s size and complexity.” It accused the corporation of failing to do adequate background checks on consumers before opening accounts and of failing to respond to transaction monitoring system (TMS) notifications. The DFS also said that Coinbase had a months-long TMS backlog, implying that the business “routinely failed to investigate and report suspicious activities as required by law.”
According to the DFS, Coinbase had a backlog of more than 100,000 unreviewed transaction monitoring notifications by late 2021. It further said that at that time, the backlog of consumers requiring “additional due diligence” had surpassed 14,000 people. Coinbase’s approach to background checks was described as a “simple check-the-box exercise” by authorities.
In 2017, the DFS awarded Coinbase a licence to operate in New York. Compliance problems initially surfaced during the agency’s 2020 safety and soundness review. Following the investigation, the DFS directed Coinbase to seek an independent consultant to assess the compliance programme and provide suggestions on how to improve in areas where the agency believed the business was falling short. As a consequence, Coinbase devised a strategy to strengthen its compliance procedures. However, after an examination that started in 2021, the DFS decided that the programme could not “keep up with Coinbase’s fast and unanticipated expansion.” Coinbase currently has over 100 million users globally.
In early 2022, the agency hired an independent monitor to assess the condition of the compliance programme and work with Coinbase to resolve the deficiencies — all while the investigation was continuing. The monitor will continue to engage with Coinbase as part of the settlement for another year. The DFS has the authority to extend the such a deadline at its discretion. Under the supervision of the DFS and the monitor, Coinbase has begun to fix many of the flaws and establish “a more effective and comprehensive compliance procedure,” while the business is still not moving swiftly enough to analyse older problematic accounts.
Other cryptocurrency companies have been fined in recent months for allegedly breaking banking restrictions. In August, the DFS fined Robinhood $30 million, while the Treasury Department struck an agreement with Kraken on charges that the exchange supplied services to Iranian clients in violation of US sanctions. The New York Times reports that investigators are looking into Binance for alleged money laundering breaches. FTX was rumoured to be under investigation before to its collapse in November; the company’s founder, Sam Bankman-Fried, pleaded not guilty to federal fraud charges last week. Last summer, it was also rumoured that the Securities and Exchange Commission was looking into Coinbase for alleged securities breaches.
