Coinbase has agreed to pay a $50 million penalty to the New York State Department of Financial Services (NYDFS) over allegations that the cryptocurrency exchange broke anti-money laundering laws. As part of the settlement, Coinbase is also required to invest an additional $50 million in its compliance program to help prevent future violations.
New York regulators found that Coinbase had “wide-ranging and long-standing failures” in the company’s anti-money laundering program, potentially putting the platform at risk of “series criminal conduct” involving fraud, money laundering, activity related to child sex abuse material, and drug trafficking.
“Coinbase failed to build and maintain a functional compliance program that could keep pace with its growth”
Coinbase responded to the settlement in a post on its website, stating that it’s “always willing to acknowledge where we have fallen short” and that it welcomes “opportunities to improve our programs.” The exchange says it has since built a crypto-focused sanctions compliance tool and made improvements to its transaction monitoring system. It also developed a customer risk scoring system to calculate the risk ratings of customers during onboarding and in the days that follow.
“Coinbase remains committed to being a leader and role model in the crypto space, and this means partnering with regulators when it comes to compliance and other areas,” the company writes. “We believe that New York — and the broader industry — needs more crypto players committed to compliance and working with regulators.”
According to the NYDFS, Coinbase was unable to keep up with the number of alerts from its transaction monitoring system, a tool that’s supposed to detect suspicious activity on the platform. Coinbase allegedly amassed a backlog of over 100,000 alerts, resulting in the company failing to report and investigate suspicious transactions in a timely manner. Last year, the NYDFS assigned an independent monitor to evaluate Coinbase’s practices and says it will continue to work with the company for another year.
Coinbase obtained a BitLicense from the NYDFS 2017, and that subjects the company to investigation to ensure it’s in compliance with the state’s crypto regulations. The NYDFS first discovered the potential violations in 2020 during a routine safety examination of the company’s practices between 2018 and 2019. The agency started the investigation in 2021, which Coinbase disclosed in a 10K filing with the Securities and Exchange Commission.
“Coinbase failed to build and maintain a functional compliance program that could keep pace with its growth,” NYDFS superintendent Adrienne Harris says in a statement. “That failure exposed the Coinbase platform to potential criminal activity.”
The news of the settlement comes as cryptocurrency exchanges face increased scrutiny following the collapse of FTX and the arrest of former CEO Sam Bankman-Fried. In November of last year, the Department of the Treasury fined crypto exchange Kraken $360,000 for similar reasons, accusing it of violating US sanctions against Iran.