In response to inquiries concerning shortcomings in its compliance program, Coinbase and the New York Department of Financial Services came to a $100 million settlement.
• The NYDFS fined Coinbase $50 million and compelled the company to invest another $50 million into its compliance program.
• “Coinbase lacked sufficient personnel, resources, and tools needed to keep up with these alerts, and backlogs rapidly grew to unmanageable levels.”
• Since 2017, Coinbase has had a license to run a virtual currency and money-transfer company in New York.
• Early in 2022, when the NYDFS discovered flaws in the exchange Know Your Customer (KYC) and transaction monitoring policies, the regulator established an impartial monitor
An agreement made
Coinbase, a prominent cryptocurrency exchange, recently reached a settlement with the New York Department of Financial Services to resolve inquiries concerning its noncompliance with the city’s regulations. After the department launched an investigation into Coinbase’s operations during 2018 and 2019, it was revealed that the platform was not in full adherence with the relevant laws in certain key areas.
Consequently, after both parties negotiated a resolution, a remarkable $100 million dollar agreement was reached. This serves as an example of how governmental bodies must vigilantly respect their influential corporate entities while simultaneously preserving their own regulatory authority and prowess.
Background Information on Coinbase in New York
Coinbase is one of the most popular digital currency exchanges in the world, having served more than 43 million customers since its founding in 2012. The company operates in 32 countries, including the United States, where it holds licenses from various state regulators such as the New York Department of Financial Services (NYDFS). These licenses are necessary for companies like Coinbase to legally operate their business within certain states.
In 2016, Coinbase became one of only eight companies to receive a BitLicense from NYDFS, which allows them to offer services related to cryptocurrencies such as Bitcoin and Ethereum in New York. However, since then Coinbase has struggled to remain compliant with anti-money laundering (AML) and know-your-customer (KYC) regulations set forth by the regulator due to its rapid growth.
Details of the $100 Million Settlement Agreement
On April 13th 2021, NYDFS announced that it had reached a settlement with Coinbase concerning numerous alleged violations including failure to maintain effective AML/KYC policies, inadequate capitalization requirements, lack of independent testing procedures for its automated trading systems, and other issues related to its virtual currency license. As part of the agreement, Coinbase agreed to pay a total financial penalty of $100 million dollars as well as invest in compliance programs and appoint an independent monitor who will review its operations over the next three years.
The agreement also requires that all funds collected by NYDFS be used solely for consumer protection and education initiatives relating to virtual currencies or other digital assets and their associated risks. This includes creating resources such as educational materials on digital asset risk factors or providing grants for research into new methods of identifying fraud or other illicit activities involving digital assets.
Settled
The recent settlement between Coinbase and NYDFS is significant not only because it marks one of the largest fines ever imposed by a state regulator on a cryptocurrency exchange but also because it sets an example for other companies operating within the crypto space that regulatory compliance is vital for long-term success. Moving forward, many exchanges will likely use this settlement as a benchmark when designing their own internal policies and procedures related to AML/KYC compliance—particularly those operating within New York State boundaries where noncompliance could result in similar costly consequences.
