Crypto exchange Coinbase reaches US$100m settlement with New York regulators

NEW YORK – Coinbase, a publicly traded cryptocurrency trading exchange based in the United States, agreed to pay a US$50 million (S$67 million) fine after financial regulators found that it let customers open accounts without conducting sufficient background checks, in violation of anti-money laundering laws.

The settlement with the New York State Department of Financial Services (DFS), announced on Wednesday, will also require Coinbase to invest US$50 million to bolster its compliance programme, which is supposed to prevent drug traffickers, sellers of child pornography and other potential lawbreakers from opening accounts with the exchange.

It is the latest hit to the once-high-flying global cryptocurrency trading business. Several cryptocurrency firms filed for bankruptcy in 2022, most notably FTX, which was the world’s second-largest crypto exchange before it collapsed in November. Sam Bankman-Fried, the founder, and other top FTX executives now face federal criminal charges.

The compliance problems at Coinbase were first detected during a routine examination in 2020, after the exchange secured a licence to operate in New York in 2017, regulators said. They found problems with the exchange’s anti-money laundering controls going as far back as 2018.

Coinbase initially agreed to hire an independent consultant to help overhaul its day-to-day operations so that they met requirements set by anti-money laundering laws to know the identities of customers and monitor their behaviour for suspicious activity.

But that did not fix the company’s problems and regulators opened a formal investigation in 2021. The exchange had fallen behind on two key operations: digging deeper into the backgrounds of customers whose identities seemed murky at first glance and following up on the suspicious-activity alerts that its internal monitoring system generated.

By late 2021, Coinbase had a backlog of more than 100,000 alerts about potential suspicious customer transactions that were not being properly examined, according to the DFS. Regulators also found that Coinbase performed only the most rudimentary “know your customer” checks on people before letting them open accounts. The exchange treated customer background checks as a “simple check-the-box exercise”, they said.

In one instance, Coinbase unwittingly helped a digital thief steal US$150 million from an unnamed company. The thief had claimed to be an employee of that company when opening a Coinbase account.

The company’s procedures for vetting the backgrounds of customers were so inadequate that in early 2022, regulators ordered Coinbase to hire an outside monitor – separate from the independent consultant the firm had previously agreed to hire – to oversee its compliance, even as the formal investigation was under way.

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

Coinbase’s compliance department had failed to keep up with the exchange’s rapid growth. Founded in San Francisco in 2012, Coinbase has a market capitalisation of more than US$7.6 billion and is the largest crypto trading platform based in the US, with 100 million users worldwide. Most of its peers are based in jurisdictions where regulations are typically lighter. FTX, for example, was based in the Bahamas.

But the US authorities have long worried about the cryptocurrency industry’s potential to weaken global anti-money laundering protections because, for years, industry leaders prided themselves on their efforts to evade regulation.

In August, the DFS fined the crypto trading arm of financial brokerage Robinhood US$30 million for violating a host 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 it provided to customers in Iran that violated US sanctions.

Federal prosecutors have also been examining whether overseas firms are properly screening the backgrounds of customers. The authorities are investigating potential anti-money laundering violations by Binance, the world’s largest crypto trading exchange, according to news reports and a person familiar with the matter.

Until the fall of 2021, Binance allowed customers making deposits under a certain amount to open accounts without undergoing a rigorous identity-verification process. Binance’s erstwhile rival, FTX, was also being investigated for failing to follow anti-money laundering rules.

Federal prosecutors in New York have charged Bankman-Fried with overseeing a scheme to misappropriate billions of dollars in customer deposits at FTX. NYTIMES