The New York Department of Financial Services said Wednesday it had reached a $100 million settlement with Coinbase over issues regarding the company’s compliance programs.
Coinbase, the largest cryptocurrency exchange based in the U.S., will be required to pay $50 million as a penalty and invest an additional $50 million to bolster its abilities to comply with financial regulations, such as transaction monitoring and know your customer (KYC) rules.
The department said it found “significant failures” in Coinbase’s compliance program that violated New York Banking Law and state regulations regarding virtual currencies, money transmitting, transaction monitoring, and cybersecurity.
The flaws in Coinbase’s compliance program made the company vulnerable to criminal conduct, according to the NYDFS, such as fraud, money laundering, and activity related to narcotics trafficking or child sexual abuse material.
“It is critical that all financial institutions safeguard their systems from bad actors,” said Superintendent of Financial Services Adrienne A. Harris. “Coinbase failed to build and maintain a functional compliance program that could keep pace with its growth.”
A “check-the-box” exercise
New York regulators found that the manner in which Coinbase abided by know your customer and customer due diligence requirements—rules used to verify the identity of people who engage with its platform—were treated as a “simple check-the-box exercise” that was inadequate.
The department found that Coinbase had a substantial backlog in its system for monitoring suspicious transactions that totaled over 100,000 unreviewed alerts by late 2021. As a result, some transactions flagged by Coinbase weren’t reviewed until months after they took place.
Because of failures in Coinbase’s compliance program, the NYDFS installed an independent monitor in early 2022 to review Coinbase’s compliance program and address issues with the company’s practices.
The independent monitor will continue to work with Coinbase as a condition of the settlement for an additional year.
The regulator noted that Coinbase has begun to address many of the issues found with its compliance program and is working to revise it practices. Coinbase did not respond immediately to requests for comment.