United States crypto exchange Coinbase has built an enviable reputation on its ease of use and sense of security thanks to FDIC-secured accounts. Today, that reputation was in question as the popular platform reached a massive $100 million settlement with New York regulators.
$50 million of this amount is a fine related to lax background checks which violate anti-money-laundering laws. The remaining $50 million will be applied to strengthening Coinbase’s compliance program to identify and prevent illegal activity on the platform.
A remote-first company, the company shut down its San Francisco headquarters in May 2020 amidst the onset of the COVID-19 pandemic. Now, Coinbase operates entirely online with no physical “base of operations.” By trading volume, it is the largest crypto exchange platform in the U.S.A.
Security for Illicit Behavior?
It turns out, compliance problems have been lurking for some time. In 2017, the platform secured a license to operate in New York. During a routine audit, regulators discovered issues with Coinbase’s anti-money-laundering controls that dated back to 2018.
Upon these findings, Coinbase agreed to hire an independent consultant to aid in the revision of daily operations. The purpose of this was to ensure compliance to the cited anti-money-laundering laws. It is among the platform’s responsibilities to verify the identities of its customers and monitoring behavior for any suspicious activity.
These stated actions were not enough to repair deep-seeded problems. in 2021, regulators launched a formal investigation into Coinbase. The exchange was failing in two significant areas: following up on questionable activity identified by internal monitoring systems and not taking a closer look at clients whose identities seemed equally questionable.
By the end of 2021, Coinbase had a backlog of more than 100,000 potentially suspicious transactions. Per the Department of Financial Services, this activity had not been thoroughly examined. It was also discovered that Coinbase performed only the most basic confirmations on clients before allowing them to open accounts.
One of the most serious transactions regulators discovered was one in which someone stole $150 million from an unnamed company by falsely posing as an employee of that organization. This was accomplished when the party opened a Coinbase account.
The exchange’s minimal vetting process prompted regulators to order Coinbase employ an outside party to ensure compliance in checking customer backgrounds. This is separate from and in addition to the independent consultant which had previously been hired.
A Twist of Fate
Amidst the turmoil and fallout generated by the spectacular collapse of FTX Holdings in November, the Coinbase settlement appears to have helped rather than hurt the exchange. Its shares closed at nearly $38 on Wednesday, an increase of approximately 12%.
On the company’s website, chief legal officer Paul Grewal wrote an equally optimistic blog post addressing the investigation and settlement. “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.”
It appears that Coinbase has learned from its mistakes and ready to play by the rules. Only time will tell however. Cryptocurrency regulation is still being figured out by both businesses and government.
Issues with the Crypto exchange’s debit card, which many are calling the ‘black hole‘ for crypto money, is another topic however. CB could be back in court soon over the alleged disappearance of millions of dollars of client funds.