Coinbase Agrees to $100 Million Settlement With New York Regulators

A flipped version of the Coinbase logo reflected in a mobile phone screen in London on Nov. 9, 2021, in a photo illustration. Leon Neal/Illustration/Getty Images

Coinbase has agreed to pay a $100 million settlement with New York state’s financial regulators.

The crypto industry was hit with a wave of bad news in 2022, with the collapse of crypto exchange giant FTX, hedge fund Three Arrows Capital, along with the failure of several key lenders.

The DFS accused Coinbase on Jan. 4 of making itself vulnerable to serious criminal conduct, such as failing to comply with anti-money laundering standards.

The popular cryptocurrency exchange agreed to pay a $50 million fine to New York’s Department of Financial Services (DFS) for allowing customers to open accounts without conducting sufficient background checks.

The settlement deal will also require the cryptocurrency firm to invest another $50 million into its internal compliance program over the next two years.

“It is critical that all financial institutions safeguard their systems from bad actors,” said DFS Superintendent Adrienne Harris in a statement.

Coinbase’s regulatory lapses led to “suspicious or unlawful conduct being facilitated through Coinbase’s platform,” according to DFS filings.

The firm was founded in 2012 in San Francisco, with a market capitalization of more than $7.6 billion, making it the largest crypto trading platform based in the United States, with 100 million users worldwide.

Like most in the crypto industry, Coinbase holds licenses outside the United States to store electronic currency worldwide.

Many of its peers are typically based in jurisdictions with less financial regulations.

New York was one of the first states to require crypto firms to obtain so-called BitLicenses in order to seek business from state customers, issuing roughly 30 so far.

Coinbase Fails to Catch Suspicious Customer Transactions, Regulators Say

Despite its open transparency, Coinbase faced more than 100,000 suspicious customer transaction alerts by late 2021, according to the DFS.

Authorities first detected problems during a routine examination in 2020, after the exchange secured a license to operate in New York in 2017, according to the state regulator.

The DFS apparently found problems with the exchange’s anti-money-laundering system, as early as 2018, The New York Times reported.

One example involved a client who had been charged with “crimes related to child sexual abuse,” but was not flagged by Coinbase’s security team after he joined the exchange, regulators said.

For over two years, the individual in question engaged in “suspicious transactions potentially associated with illicit activity without detection.”

In the end, Coinbase identified the user, shut down the account, and reported his activity to law enforcement.

Coinbase Says Will Be More Vigilant With Compliance From Now

Coinbase said it will be committed to rectifying the issues identified by the DFS and that its leadership has long been in favor of strengthening regulations for the crypto industry.

Meanwhile, Coinbase chief legal officer Paul Grewal told The Wall Street Journal in a statement that the crypto firm has “taken substantial measures to address these historical shortcomings.”

The company “remains committed to being a leader and role model in the crypto space, including partnering with regulators when it comes to compliance,” he added.

The crypto exchange, which was founded by its CEO Brian Armstrong, is the only publicly traded cryptocurrency exchange in the United States, appearing on the Nasdaq.

Company officers disclosed the regulatory probe in its 2021 10-K filing with the Security and Exchange Commission (SEC).

“We have been very outspoken about illicit financing concerns in the space,” Harris told The New York Times.

“It is why our framework holds crypto companies to the same standard as for banks.”

Many firms rely on Coinbase to store their cryptocurrency assets, due to its reputation of its regular compliance with the SEC and its reputation for tight security.

“Despite the prevailing notion that crypto companies don’t want to be regulated, many—if not most—companies have been working with policymakers for years,” wrote Armstrong in an op-ed for CNBC.

Cryptocurrency Still Viewed With Suspicion By Authorities Worldwide

The move by New York comes after both state and federal regulators began to ramp up enforcement following the massive collapse of FTX in November, formerly one of the largest crypto exchanges in the world.

Federal, state, and international authorities have long worried about cryptocurrency’s potential to weaken global anti-money-laundering protections, as industry leaders have touted their efforts to evade government regulations.

Politicians like Democrat Sen. Elizabeth Warren of Massachusetts have suggested that proper oversight of crypto should be solely handled by federal authorities, like the SEC.

Some analysts and lawmakers believe that the reputation of digital currencies will eventually recover under greater oversight by the government in the wake of last year’s crimes and disasters.

Coinbase has been recently forced to cut its staff and major projects, such reducing its workforce 18 percent last summer, as it prepared for a recession like the much of the tech industry.

The crypto exchange was also hit with the loss of some of its user base and a reported a 27 percent year over year decline in revenue in mid-2022.

Coinbase shares rose over 12 percent on news of the settlement to nearly $38.