Coinbase in $100M Settlement Over 'Significant Deficiencies' in Compliance
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Coinbase in $100M Settlement Over 'Significant Deficiencies' in Compliance

Created 8mo ago, last updated 8mo ago

The U.S. cryptocurrency exchange's stock jumped almost 14% on news of the agreement with New York financial regulators.

Coinbase in $100M Settlement Over 'Significant Deficiencies' in Compliance

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Coinbase has announced a $100 million settlement with New York financial regulators over widespread shortcomings in its compliance systems — revealed by its tremendous growth during the bull market of 2020 and 2021.

The Nasdaq-listed cryptocurrency exchange agreed to a $50 million settlement with the New York Department of Financial Services (NYDFS). It also promised to spend another $50 million to upgrade its compliance systems.

Coinbase, whose shares have lost 85% during the bear market, was up nearly 14% after announcing the settlement on Wednesday.

In 2020, the regulator said it discovered "significant deficiencies" in its Know Your Customer and Anti-Money Laundering controls, deep backlogs in its transaction monitoring system, and shortcomings in its sanctions enforcement controls — all of which were overwhelmed by the company's rapid growth.

Coinbase was one of the first exchanges to obtain an NYDFS BitLicense, widely considered the gold standard in U.S. crypto regulation.

Overwhelmed by Growth

"Over the course of 2021, it became clear that Coinbase's compliance system was inadequate to handle the growing volume of Coinbase's business, a situation that was exacerbated by tremendous growth in its customer base," the NYDFS said — noting its "monthly transactions in November 2021 were 25 times January 2020 levels."

The company "lacked sufficient personnel, resources and tools needed to keep up with these alerts, and backlogs rapidly grew to unmanageable levels."

By the end of 2021, Coinbase's backlog of unreviewed transaction monitoring alerts had ballooned to more than 100,000. The backlog of customers requiring extra scrutiny "exceeded 14,000," the New York regulator added.

Coinbase Reacts

Running through a list of compliance upgrades and systems the company has built in the past two years, Coinbase chief legal officer Paul Grewal said the company believes that its "investment in compliance outpaces every other crypto exchange anywhere in the world." He added:

"We view this resolution as a critical step in our commitment to continuous improvement, our engagement with key regulators, and our push for greater compliance in the crypto space — for ourselves and others."

That's of particular importance right now, Grewal said. Referring obliquely to the collapse of looted competitor FTX, which has left some one million customers missing as much as $8 billion, he added:

"We recognize that the crypto industry is at an inflection point right now and that every public move by a crypto company will receive intense scrutiny. We believe that New York — and the broader industry — needs more crypto players committed to compliance and working with regulators. That is one of the reasons why we knew it was important to bring this matter to a conclusion, even though it is never the type of agreement reached lightly."
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