Cryptocurrency exchange Coinbase has agreed a $100 million settlement with the New York State Department of Financial Services (DFS), which accused it of violating regulations related to virtual currency, money transmitting, transaction monitoring and cybersecurity. "These failures made the Coinbase platform vulnerable to serious criminal conduct, including, among other things, examples of fraud, possible money laundering, suspected child sexual abuse material-related activity and potential narcotics trafficking," the agency said. The company will pay the state a $50 million fine and invest $50 million to address the issues flagged by the regulator and comply with a DFS-approved plan.
The agency claimed that Coinbase's practices concerning due diligence, transaction monitoring and sanctions compliance (among others) were "inadequate for a financial services provider of Coinbase’s size and complexity." It accused the company of failing to carry out sufficient background checks on customers before they opened accounts and being unable to keep up with transaction monitoring system (TMS) alerts. The DFS added that Coinbase had a months-long TMS backlog that meant the company "routinely failed to timely investigate and report suspicious activity as required by law."
By late 2021, the DFS said, Coinbase had a backlog of more than 100,000 transaction monitoring alerts it had not reviewed. It also noted that by that time, the backlog of customers who required "enhanced due diligence exceeded 14,000." Coinbase's approach to background checks amounted to a “simple check-the-box exercise,” regulators claimed.
The DFS granted Coinbase a license to operate in New York in 2017. Compliance issues first emerged during a safety and soundness examination that the agency conducted in 2020. Following that probe, the DFS ordered Coinbase to hire an independent consultant to review the compliance program and offer recommendations on how to improve in areas in which the agency felt the company was falling short. As a result, Coinbase adopted a plan to bolster its compliance program. However, following an investigation it began in 2021, the DFS determined that the program could not "keep up with the dramatic and unexpected growth of Coinbase’s business." Coinbase now has more than 100 million users worldwide.
The agency brought in an independent monitor in early 2022 to evaluate the state of the compliance program and work with Coinbase to address the issues — all while the investigation was ongoing. As part of the settlement, the monitor will work with Coinbase for another year. The DFS can extend that timeframe at its discretion. The agency pointed out that Coinbase has started to address many of the issues and develop "a more effective and robust compliance program" under the eyes of the DFS and the monitor, though it noted that the company still isn't moving quickly enough to review older suspicious accounts.
Other crypto firms have faced penalties in recent months for allegedly violating financial regulations. The DFS fined Robinhood $30 million in August, while the Treasury Department reached a settlement with Kraken over claims that the exchange provided services to customers in Iran in violation of US sanctions. According to The New York Times, regulators are investigating Binance over possible money laundering violations. Before its collapse in November, FTX was said to have been under investigation too — the company's founder, Sam Bankman-Fried, pled not guilty to federal fraud charges this week. It was also reported last summer that the Securities and Exchange Commission was investigating Coinbase over possible securities violations.