Coinbase agrees to pay NYDFS $100M over state law violations

Coinbase has agreed to pay a $100 million fine to New York regulators for allowing customers to create accounts with insufficient background checks, multiple reports said.

The agreement with the New York State Department of Financial Services (NYDFS) demands Coinbase pay a $50 million fine and spend $50 million on regulatory improvements over the next two years, the company announced Wednesday.

According to New York regulators, failures in Coinbase's compliance program could lead to "vulnerable to serious criminal conduct" such as "examples of fraud, possible money laundering, suspected child sexual abuse material-related activity, and potential narcotics trafficking."

Background check failures, anti-money-laundering law violations

Consequently, Coinbase's compliance system became "overwhelmed," with a significant backlog of unreviewed transaction monitoring alerts, exposing the platform to the dangers of exploitation by criminals and "bad actors."

Reports said the company treated customer sign-ups as "a simple check-the-box exercise."

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As a result, regulators claimed that Coinbase failed to conduct thorough due diligence, claiming it "did the bare minimum" to authenticate customer information and ignored information that was "on its face clearly inaccurate."

"It is critical that all financial institutions safeguard their systems from bad actors, and the Department's expectations with respect to consumer protection, cybersecurity, and anti-money laundering programs are just as stringent for cryptocurrency companies as they are for traditional financial services institutions," NYDFS superintendent Adrienne Harris said in a statement.

"It is critical that all financial institutions safeguard their systems from bad actors."

Adrienne Harries, New York State Department of Financial Services superintendent

Harris continued to say that the firm "failed to build and maintain a functional compliance program," jeopardizing 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," she said.

Coinbase revealed the New York investigation into its compliance program in its 2021 annual filing.

"Today Coinbase and NYDFS have come to an agreement to settle a NYDFS investigation, disclosed in our 2021 annual 10K filing, into our historical compliance program."

Paul Grewal, chief legal officer at Coinbase

Unlawful, suspicious instances

Coinbase accepted a customer who had been convicted of crimes linked to child sexual abuse substance in the 1990s.

Before closing the accounts, however, the company allowed the customer to participate in fraudulent transactions for more than two years.

Coinbase also allowed a person posing as an employee of a corporation to set up an account on its behalf without approval. Even though the case was later recovered, it resulted in a $150 million theft.

The department stated that by late 2021, Coinbase had struggled to keep up with an increasing backlog of over 100,000 "unreviewed transaction monitoring alerts."

In order to operate in New York, companies providing crypto services must acquire a BitLicense, which enables authorities to perform evaluations and supervision.

NYDFS also sanctioned Robinhood Markets Inc.'s crypto arm $30 million in August for anti-money laundering and other policy violations.

Coinbase's chief legal officer, Paul Grewal, told NPR on Wednesday that the company "remains committed to being a leader and role model in the crypto space."

"Although we have not always been perfect, our goal has always been and will always be to build the most trusted, compliant, and secure crypto exchange in the world," Grewal said.

Crypto market controversies

The deal comes as the cryptocurrency sector is under scrutiny after the collapse of FTX, the world's second-largest exchange, which resulted in billions of dollars in losses for an estimated million customers.

The cryptocurrency industry has faced growing regulatory strain with enforcing know-your-customer standards and an anti-money laundering initiative.

According to Bloomberg, Binance and FTX both faced U.S. investigations for money laundering.

The Coinbase settlement comes on the heels of a joint statement issued by the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation on the influence that crypto is expected to have on financial institutions.

"Given the significant risks highlighted by recent failures of several large crypto-asset companies, the agencies continue to take a careful and cautious approach related to current or proposed crypto-asset-related activities and exposures at each banking organization," the statement reads.

Coinbase shares rose 11 percent to $37.41 as of 11:53 a.m. in New York. Last year, the stock dropped 86 percent. Bitcoin, on the other hand, fell 64 percent last year.