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Coinbase Reaches $100 Million Settlement With New York Regulators

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Coinbase, a publicly traded US-based cryptocurrency exchange, has agreed to pay a $50 million fine after financial regulators found it allowed customers to open accounts without carrying out sufficient background checks, in violation of anti-money laundering laws.

The deal with the New York State Department of Financial Services, announced on Wednesday, will also require Coinbase to invest $50 million to bolster its compliance program, which is expected to prevent drug dealers, sellers of child pornography and other potential infringers open accounts with the exchange.

It is the latest success in the global cryptocurrency trading business. Several cryptocurrency companies filed for bankruptcy last year — most notably FTX, which was the world’s second-largest cryptocurrency exchange before it collapsed in November. Sam Bankman-Fried, the founder, and other top FTX executives now face federal criminal charges.

Compliance issues at Coinbase were first spotted during a routine review in 2020 after the exchange secured a license to operate in New York in 2017, regulators said. They found issues with the exchange’s anti-money laundering controls going back to 2018.

Coinbase initially agreed to hire an independent consultant to help review its day-to-day operations to meet requirements set by 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: delving deeper into the backgrounds of customers whose identities seemed obscure at first glance and keeping track of suspicious activity. alerts generated by its internal monitoring system.

As of late 2021, Coinbase had a backlog of more than 100,000 alerts about potential suspicious customer transactions that were not being properly vetted, according to the Department of Financial Services. Regulators also found that Coinbase performed only the most rudimentary “know your customer” checks before allowing them to open accounts. 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 unidentified company by claiming to be an employee of that company by opening a Coinbase account.

The company’s procedures for reviewing customer backgrounds were so inadequate that, early last year, regulators ordered Coinbase to hire an external monitor – separate from the independent consultant the company had agreed to hire – to oversee its compliance, even when the formal investigation was underway.

“We found flaws that really warranted installing an independent monitor rather than waiting for an agreement,” Adrienne A. Harris, superintendent of financial services for the state of New York, said in an interview. “We have been very open about concerns of illicit funding in space. That’s why our framework holds crypto companies to the same standard as banks.”

“Coinbase remains committed to being a leader and role model in the crypto space, and that means partnering with regulators when it comes to compliance and other areas,” the company’s Chief Legal Officer Paul Grewal wrote in a blog post on its website in Wednesday.

The deal, which says Coinbase is still moving very slowly in its efforts to review its old accounts for suspicious assets, will require the exchange to work with the monitor for at least another year as it puts systems in place to improve. your compliance operation. New York regulators did not identify the monitor.

Mrs. Harris said that Coinbase’s compliance department was unable 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 US-based cryptocurrency trading platform with 100 million users worldwide. Most of its peers are based in jurisdictions where regulations are typically lighter. FTX, for example, was headquartered in the Bahamas.

But US officials have long been concerned about the cryptocurrency industry’s potential to weaken global protections against money laundering because, for years, industry leaders have prided themselves on their efforts to evade regulation.

The industry itself emerged without the oversight and scrutiny that are routine for banks, brokerages, insurance companies and investment firms. Over the past decade, state and federal authorities have taken every step possible to bring exchanges like Coinbase and its overseas peers in line.

New York was one of the first states to require cryptocurrency companies to obtain licenses before seeking business with state clients, known as BitLicenses. To date, the state has issued about 30.

In August, the Department of Financial Services fined the cryptocurrency trading arm of financial broker Robinhood $30 million for violating a range of financial regulations, including anti-money laundering laws. In November, the Treasury Department announced a settlement with another US-based exchange, Kraken, over trading services provided to customers in Iran that violated US sanctions.

According to the Treasury’s Office of Control of Foreign Assets, Kraken allowed about $1.7 million in transactions over four years. He agreed to pay over $360,000 to settle the matter.

Federal prosecutors are also looking into whether foreign companies are adequately vetting clients’ backgrounds. Authorities are investigating possible money laundering violations by Binance, the world’s largest cryptocurrency exchange, according to reports and a person familiar with the matter.

Until fall 2021, Binance allowed customers who made deposits below a certain amount to open accounts without being subjected to a rigorous identity verification process. Binance’s former rival FTX was also under investigation for failing to follow anti-money laundering rules.

Federal prosecutors in New York have charged Mr. Bankman-Fried to oversee a scheme to embezzle billions of dollars in FTX customer deposits.

Coinbase has recently sought to distinguish itself from FTX. In a television announcement, the exchange said that customer deposits at its company were secure and that 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 its compliance with bank secrecy laws. The company said at the time that it was cooperating with the investigation.

In the same regulatory filing, Coinbase also said it has received “subpoenas and investigative requests” of SEC documents about some of its programs and products from customers.

“We’ve seen this argument that regulation and innovation can’t coexist,” Harris said. “But if you are a good, responsible actor, you can still do business.”