Coinbase, a publicly traded cryptocurrency exchange based in the United States, agreed to pay a $50 million fine after financial regulators discovered that customers could open accounts without conducting adequate background checks, in violation of anti-money laundering laws.
The settlement with the New York State Department of Financial Services, announced Wednesday, also requires Coinbase to invest $50 million to bolster its compliance program, which aims to prevent drug traffickers, child pornography sellers and other would-be lawbreakers from opening accounts with the stock exchange.
It is the latest hit for the once soaring global cryptocurrency trade. Several cryptocurrency companies have filed for bankruptcy in the past year, most notably FTX, the second largest crypto exchange in the world before its collapse in November. Sam Bankman-Fried, the founder, and other top executives of FTX are now facing criminal charges.
Coinbase’s compliance issues were first discovered during a routine investigation in 2020 after the exchange obtained a license to operate in New York in 2017, regulators said. They uncovered issues with the exchange’s anti-money laundering controls dating back to 2018.
Coinbase initially agreed to hire an independent consultant to review its day-to-day operations so that they met the requirements of anti-money laundering laws to know customers’ identities and monitor their behavior for suspicious activity.
But that didn’t solve the company’s problems, and regulators opened a formal investigation in 2021. The exchange had fallen behind on two key operations: digging deeper into the backgrounds of customers whose identities seemed unclear at first glance and following up on the suspicious activity alerts its internal monitoring system generated.
At the end of 2021, Coinbase had a backlog of more than 100,000 alerts about potential suspicious customer transactions that were not properly investigated, according to the Department of Financial Services. Regulators also found that Coinbase performed only the most rudimentary “know your customer” checks on people before they were allowed to open an account. The exchange treated customer background checks as a “simple check-the-box exercise,” they said.
In one case, Coinbase unwittingly helped a digital thief steal $150 million from an unnamed company by claiming to be an employee of that company when opening a Coinbase account.
The company’s procedures for vetting clients’ backgrounds were so inadequate that early last year, regulators directed Coinbase to hire an outside monitor — separate from the independent consultant the company had previously agreed to hire — to oversee its compliance even when the formal investigation is underway.
“We found failures that really warranted putting in place an independent observer instead of waiting for a settlement,” New York State Superintendent of Financial Services, Adrienne A. Harris, said in an interview. “We have been very outspoken about illegal funding issues in space. That is why our framework holds crypto companies to the same standard as it does for banks.”
“Coinbase remains committed to being a leader and role model in the crypto space, and this means working with regulators on compliance and other areas,” the company’s chief legal officer, Paul Grewal, wrote in a statement. blog post on his website on Wednesday.
Shares of Coinbase were up 12 percent on Wednesday to close at nearly $38.
The settlement, which says Coinbase is still moving too slowly in its efforts to monitor its older accounts for suspicious features, requires the exchange to work with the monitor for at least another year as it puts systems in place to improve its compliance operation. New York regulators have not identified the monitor.
Ms. Harris said Coinbase’s compliance department had failed to keep up with the exchange’s rapid growth. Founded in San Francisco in 2012, Coinbase has a market capitalization of over $7.6 billion and is the largest crypto trading platform in the United States, with 100 million users worldwide. Most of his colleagues are based in jurisdictions where regulations tend to be lighter. For example, FTX was based in the Bahamas.
But U.S. authorities have long been concerned about the cryptocurrency industry’s potential to weaken global protections against money laundering, as industry leaders have prided themselves on their efforts to evade regulations for years.
The industry itself emerged without the oversight and scrutiny routine for banks, brokerages, insurance companies and investment firms. Over the past decade, state and federal authorities have taken every possible step to bring exchanges like Coinbase and its foreign counterparts into line.
New York was one of the first states to require crypto companies to obtain licenses before doing business with state clients, known as BitLicenses. To date, the state has issued about 30.
In August, the Department of Financial Services fined the crypto trading arm of financial brokerage Robinhood $30 million for violating numerous financial regulations, including anti-money laundering laws. In November, the Treasury Department announced a settlement with another US-based exchange, Kraken, over allegations that the trading services it provided to clients who appeared to be in Iran may have been in violation of US sanctions.
Kraken has facilitated approximately $1.7 million in transactions over four years, according to the Treasury’s Office of Foreign Assets Control. It agreed to pay more than $360,000 to settle the case.
Federal prosecutors have also investigated whether foreign firms properly screen clients’ backgrounds. According to news reports and a person familiar with the matter, authorities are investigating possible anti-money laundering violations by Binance, the world’s largest crypto trading exchange.
Until Fall 2021, Binance allowed customers who made deposits below a certain amount to open accounts without being subject to a rigorous identity verification process. Binance’s former rival, FTX, was also under investigation for non-compliance with anti-money laundering regulations.
Federal prosecutors in New York have charged Mr. Bankman-Fried accused of overseeing a plan to embezzle billions of dollars in customer deposits at FTX.
Coinbase recently tried to differentiate itself from FTX. In a televised advertisement, the exchange said customer deposits with the company were safe and crypto investors could take comfort in the fact that Coinbase was a US-based, publicly traded company “with regular audits and transparent accounting.”
In a November regulatory filing with the Securities and Exchange Commission, Coinbase disclosed that it had been the subject of an investigation by New York financial regulators into compliance with banking secrecy laws. The company said at the time that it was cooperating with the investigation.
In the same regulatory filing, Coinbase also said it had received “investigation subpoenas and requests” for documents from the SEC regarding some of its client programs and products.
“We’ve seen this argument that regulation and innovation can’t go together,” said Ms. Harris. “But if you’re a good, responsible actor, you should still be able to do business.”
