The New York Department of Financial Services on Wednesday announced a $100 million settlement with Coinbase over failures in its compliance program, which regulators said made the crypto exchange vulnerable to criminal activity ranging from money laundering to drug trafficking.
As an industry based on privacy and anonymity, crypto companies have a long history of fighting anti-money laundering and “know your customer” laws. Still, Coinbase has positioned itself as a law-abiding citizen among a crowded field of exchanges that includes dubious companies like Binance and imploding companies like FTX. Regulation expert told fortune that Coinbase’s settlement opens a large target behind the crypto heavyweights, even those seeking to play by the rules.
“DFS is the alpha predator when it comes to crypto regulation,” said Eric Soufer, head of crypto and fintech practice at Tusk Strategies and former senior counsel to two New York attorneys general.
Unlike other states that have led the charge for crypto enforcement, such as Texas and Alabama, Soufer said New York has a full set of crypto-specific regulations and experts. While the attorney general’s office handles enforcement for unregistered companies, like the settlements with Bitfinex and Tether, DFS can take action against companies with New York licenses, such as Robinhood.
Coinbase received a license from DFS to operate in New York as a virtual currency and remittance business in 2017. In 2020, DFS said Coinbase’s compliance program was inadequate, with the company treating customer onboarding requirements as a simple check-the-box exercise and a backlog. of 100,000 unreviewed transactions, according to the department.
Although Coinbase agreed to hire an independent consultant, it was not enough to meet the agency’s requirements. The regulator opened a formal investigation in 2021—a fact noted in Coinbase’s 2021 10-K—peak at the January 4 settlement. Coinbase will pay a penalty of $50 million to New York State and has agreed to invest an additional $50 million in compliance.
“We see this resolution as a critical step in our commitment to continuous improvement, our engagement with key regulators, and our push for greater alignment in the crypto space,” Coinbase chief legal officer Paul Grewal wrote in a company post published Wednesday.
Tradeoffs of regulation
Soufer said the nine-figure settlement, however many titles are up for grabs, will not change the bottom line for Coinbase or its financial stability.
“Coinbase makes a decision if there is a long-term value that is regulated,” he said fortune. “Every company regulated by DFS knows there will be some tradeoff.”
Due to the nature of crypto, Soufer said, even compliant companies still struggle with AML and KYC laws because it is difficult to find outside vendors and experts to help provide the expertise or resources they need. An example is the recent push for exchanges to complete proof-of-reserve audits and the reluctance of accounting firms to participate.
Charley Cooper, managing director at blockchain company R3 and former chief of staff at the Commodity Futures Trading Commission, said fortune that crypto companies that hire experts remain at a disadvantage compared to traditional financial companies, which usually have entire departments that have been doing related compliance work for decades.
Even if Coinbase tries to comply with DFS, it may not be a problem for the embattled sector or Coinbase, which has seen its share price drop by nearly 90% since November 2021.
With the collapse of FTX, Cooper said regulators will increase their attention on the crypto industry, regardless of whether the bad results are the result of fraud or incompetence.
“The truth is, perception matters in politics—and in policymaking—sometimes more than reality,” he said fortune. “Crypto suffers from an important cultural problem today.”
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