Coinbase vulnerable to drug trafficking, money laundering and fraud, regulators say
Coinbase is vulnerable to money laundering, drug trafficking and fraud, financial regulators in New York said Wednesday in a settlement that requires the cryptocurrency exchange to strengthen its security.
New York's Department of Financial Services (NYDFS) found that Coinbase has done a poor job at vetting new customers and examining transactions on the exchange to ensure they comply with state banking, cybersecurity and other rules. Under the settlement, the company will pay a $50 million penalty and agreed to spend another $50 million over the next two years to address shortcomings identified by the agency.
State regulators expect all financial institutions, including crypto companies, to protect customers from "bad actors," said NYDFS Superintendent Adrienne Harris, in a statement.
Coinbase's fine is another blemish on the fledgling crypto world, which was rocked in November by the sudden collapse of FTX Trading. Other prominent industry players, including BlockFi, Celsius Network and Voyager Digital, also filed for bankruptcy as crypto prices slumped in 2022. As of Wednesday, the price of bitcoin has fallen 63% compared to a year ago.
New York regulators cleared Coinbase to operate in the state in 2017. But the company's rapid growth has outstripped its ability to monitor all the transactions on its system, NYDFS said. Coinbase had more than 100,000 unreviewed transactions on its platform as of late 2021, the agency noted.
Coinbase said in a statement Wednesday that it began working with NYDFS on its investigation in 2018. During that process, the department spotted areas where Coinbase needed to improve in order to fall in line with state regulations.
Coinbase said Wednesday that it has revamped its transaction monitoring system and can now "detect patterns suggestive of fraud, money laundering, or other illicit activity and flag them for further review by our investigators." The company also said it has launched tools that help identify customers who are a high risk for engaging in illegal activity.
"We took NYDFS's concerns seriously and have taken substantial measures to address these historical shortcomings," Coinbase Chief Legal Officer Paul Grewal wrote in a company blog post. "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."
After noticing so many unchecked transactions, New York regulators assigned an independent monitor to Coinbase a year ago to help the company clear the backlog. The monitor, who regulators didn't name, will continue working with Coinbase for another year.
More than 46,000 people reported losing a total $1 billion due to crypto scams between January 2021 and March 2022, the Federal Trade Commission has reported. International criminals laundered more than $8.6 billion in crypto in 2021, according to blockchain company Chainalysis.
Coinbase, which is publicly traded, is the nation's largest crypto exchange, with 108 million users and $101 billion worth of digital assets on its platform. But its growth has slowed, and the company laid off 1,100 employees last June after CEO Brian Armstrong admitted the company brought on too many workers too quickly.
Coinbase shares jumped about 12% to nearly $38 a share in afternoon trading Wednesday.
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