Coinbase vulnerable to drug trafficking, money laundering and fraud, regulators say

Coinbase vulnerable to drug trafficking, money laundering and fraud, regulators say

  • Finance
  • January 4, 2023
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Coinbase is vulnerable to money laundering, drug trafficking and fraud, financial regulators in New York said Wednesday in a settlement requiring the cryptocurrency exchange to increase its security.

New York’s Department of Financial Services (NYDFS) found that Coinbase has done a poor job of screening new customers and investigating transactions on the exchange to ensure they comply with state banking, cybersecurity, and other rules. As part of the settlement, the company will pay a $50 million penalty and agree to spend an additional $50 million over the next two years to address the shortcomings identified by the agency.

State regulators expect all financial institutions, including crypto companies, to protect customers from “bad actors,” NYDFS Superintendent Adrienne Harris said in a statement.

Coinbase’s fine is another blemish in the fledgling crypto world, which was rocked by the sudden collapse of FTX Trading in November. Other prominent industry players including BlockFi, Celsius Network, and Voyager Digital also filed for bankruptcy as crypto prices plummeted in 2022. As of Wednesday, Bitcoin’s price is down 63% year-on-year.

The cryptocurrency industry reacts to the collapse of FTX 04:03

New York regulators cleared Coinbase for operations in the state in 2017. However, the company’s rapid growth has outpaced its ability to monitor all transactions on its system, NYDFS said. Coinbase had more than 100,000 unverified transactions on its platform at the end of 2021, the agency found.

Coinbase said in a statement Wednesday that it began working with NYDFS on its investigation in 2018. During this process, the department discovered areas where Coinbase needed improvement to comply with government regulations.

Coinbase said Wednesday that it has overhauled its transaction monitoring system and can now “detect patterns that indicate fraud, money laundering or other illegal activity and flag them for further review by our investigators.” The company also said it has introduced tools to help identify customers who pose a high risk of engaging in illegal activities.

“We have listened to NYDFS’ concerns and taken significant action to address these historical deficiencies,” Paul Grewal, Coinbase’s chief legal officer, wrote in a company blog post. “We see this resolution as a critical step in our commitment to continuous improvement, our engagement with key regulators, and our quest for greater compliance in the crypto space – for ourselves and others.”

A year ago, after noting so many unverified transactions, New York regulators assigned Coinbase an independent observer to help the company clear the backlog. The monitor, whose name regulators have not named, will continue to work with Coinbase for another year.

More than 46,000 people reported losing a total of $1 billion to crypto fraud between January 2021 and March 2022, the Federal Trade Commission reported. According to blockchain firm Chainalysis, international criminals laundered more than $8.6 billion worth of crypto in 2021.

Publicly traded Coinbase is the country’s largest crypto exchange, with 108 million users and $101 billion worth of digital assets on its platform. But growth has slowed, and the company laid off 1,100 employees last June after CEO Brian Armstrong admitted the company had hired too many workers too quickly.

Coinbase shares are up about 12% to nearly $38 a share in afternoon trade on Wednesday.

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Christopher J Brooks

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