(Kitco News) - Coinbase, the top cryptocurrency exchange in the United States, has agreed to pay a $50 million fine to the New York State Department of Financial Services to settle charges that it allowed customers to open accounts without conducting adequate background checks, which violates anti-money-laundering (AML) laws.
As was first reported by the New York Times, the settlement will also require the exchange to invest an additional $50 million over the next two years to enhance its compliance program and ensure that it meets the regulatory requirements.
The issues with compliance at Coinbase – which was granted a license to operate in New York in 2017 – were first discovered during a routine examination in 2020, according to regulators. Problems with the exchange’s anti-money laundering checks have been detected as far back as 2018.
After Coinbase failed to solve the issue by hiring an independent consultant to help overhaul its day-to-day operation to bring it into compliance, regulators opened a formal investigation into the matter in 2021.
The main areas of concern for regulators centered around two key issues: failure to conduct a deeper investigation into customers whose identities appeared shady at first observation and following up on the suspicious-activity alerts that its internal monitoring system generated.
The exchange had amassed a backlog of more than 100,000 alerts about potential suspicious customer transactions by late 2021, according to the Department of Financial Services, and the alerts were not being properly examined.
Regulators also charged Coinbase with conducting a “simple check-the-box exercise” when performing its know-your-customer (KYC) checks for customers, which is the simplest form of background check available. Matters got so bad at the exchange in early 2022 that regulators ordered the firm to hire an outside monitor, aside from the independent consultant it previously hired, to oversee its compliance while the investigation was ongoing.
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As part of the settlement, Coinbase will be required to work with the monitor for at least another year as it develops the proper systems to bring its operation into compliance.
In a blog post written by Paul Grewal, the chief legal officer at Coinbase, Grewal reaffirmed the exchange’s commitment to coming into compliance with KYC/AML regulations and being a model for the rest of the crypto community.
“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,” Grewal said. “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.”
