Jan 4, 2023 - Economy

Coinbase reaches $100 million settlement with New York regulators over compliance shortcomings

Illustration of a Coinbase logo sweating in the spotlight.

Illustration: Aïda Amer/Axios

Coinbase Global, the U.S.'s largest crypto exchange, agreed to a $100 million settlement with New York's Department of Financial Services on Wednesday for compliance shortfalls.

  • Driving the news: Coinbase will pay a $50 million fine for allowing customers to open accounts with little done in terms of background checks, and has committed an additional $50 million to bone up its compliance program.

Why it matters: Coinbase and its co-founding chief Brian Armstrong recently told Axios' Dan Primack in a wide-ranging interview that the "bull case" for the exchange was trust.

  • "We’re the leader in the market from a trust point of view and the largest [exchange] in the U.S," Armstrong said just weeks ago.
  • "The market is giving us very clear feedback that they want to work with trusted companies if they’re going to be centralized actors."

Of note: Coinbase's stock was up 5% as of Wednesday afternoon, outperforming the broader market.

What we’re watching: NYDFS is not the only agency to investigate Coinbase’s business practices. In its August earnings filing, the firm said it had also received investigative requests from the SEC.

What's happening: Superintendent Adrienne Harris said that an examination and subsequent enforcement investigation, found much of Coinbase's compliance systems wanting.

  • Coinbase's Bank Secrecy Act/Anti-Money Laundering program, which includes Know-Your-Customer due diligence, its monitoring and alerts, as well as its sanctions compliance systems, "were inadequate for a financial services provider of Coinbase’s size and complexity," Harris said in a press statement.
  • New York state regulators have been cracking down on licensed crypto firms, with the first enforcement action levied at Robinhood in August.

What they found: NYDFS says during the time period in question, the compliance program failed to keep up with the growth of Coinbase’s business and was overwhelmed with a backlog of more than 100,000 unreviewed transaction monitoring alerts.

  • In particular, it claims Coinbase’s “know your customer” (KYC) program was immature and inadequate, doing the bare minimum to verify customer due diligence.
  • Coinbase also failed to sufficiently monitor customer transactions to address suspicious activity, the agency says.

Context: The agency’s look into Coinbase was initially spurred by a safety and soundness investigation in 2020 as part of NYDFS’ routine oversight of the exchange that was also disclosed in the company's 2021 annual filing.

  • According to the agency, it found “serious deficiencies” in Coinbase’s compliance function, which included its anti-money laundering and Office of Foreign Assets Control (OFAC) sanctions programs.
  • Coinbase hired an independent consultant to assess its compliance program and provide recommendations, after which Coinbase adopted a remediation plan to improve the function.

What they're saying: "We are always willing to acknowledge where we have fallen short and we welcome opportunities to improve our programs," Paul Grewal, Coinbase's chief legal officer, said in a blog post published Wednesday morning.

The bottom line: Coinbase said on its third-quarter earnings call on Nov. 3 that it still held an outlook of staying within the $500 million in adjusted earnings before interest, taxes, depreciation, and amortization (Ebitda) loss.

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