Coinbase just closed a $100 million deal with New York regulators. Here’s what that means for crypto

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The New York Department of Financial Services on Wednesday announced a $100 million settlement with Coinbase over failures in its compliance program, which the regulator says has left the crypto exchange vulnerable to criminal behavior ranging from money laundering. money to drug trafficking.

As an industry built on privacy and anonymity, crypto companies have a long history of AML violations and know your customer laws. Yet Coinbase has positioned itself as the law-abiding citizen among a crowded exchange field that includes dodgy companies like Binance and imploding companies like FTX. Regulatory experts told Fortune that the Coinbase settlement reveals the growing target on the backs of crypto heavyweights, even those looking to play by the rules.

DFS is the alpha predator when it comes to crypto regulation, said Eric Soufer, head of the crypto and fintech practice at Tusk Strategies and former senior adviser to two New York attorneys general.

Unlike other states that are leading the charge in crypto enforcement, such as Texas and Alabama, Soufer said New York has a comprehensive set of crypto-specific regulations and experts. . While the Attorney General’s office handles enforcement for unregistered companies, such as settlements with Bitfinex and Tether, DFS can bring suits against licensed companies in New York, such as Robinhood.

Coinbase received a license from DFS to operate in New York as a virtual currency business and money transfer business in 2017. In 2020, DFS declared Coinbases compliance program inadequate, with the company addressing compliance requirements. onboarding customers as a simple tick-box exercise and a backlog of 100,000 unexamined transactions, according to the department.

Even though Coinbase agreed to hire an independent consultant, it was not enough to meet the agency’s requirements. Regulators opened a formal investigation in 2021, a fact noted in Coinbases 2021 10-K, resulting in the January 4 settlement. Coinbase will pay a $50 million fine to New York State and has agreed to invest an additional $50 million in compliance.

We view this resolution as a crucial step in our commitment to continuous improvement, our engagement with key regulators, and our efforts for greater compliance in the crypto space, Coinbase Chief Legal Officer Paul Grewal wrote in a statement. company article published Wednesday.

The trade-offs of regulation

Soufer said the nine-figure settlement, no matter how many headlines it attracts, will not change Coinbase’s fundamentals or its financial stability.

Coinbase decided there was long-term value in being regulated, he told Fortune. Every business regulated by DFS understands that there will be trade-offs.

Due to the nascent nature of crypto, Soufer said, even compliant businesses are still struggling with AML and KYC laws due to the difficulty of finding outside vendors and experts to help provide expertise or support. resources required. One example is the recent push for exchanges to perform reserve proof audits and the reluctance of accounting firms to get involved.

Charley Cooper, chief executive of blockchain firm R3 and former chief of staff at the Commodities Futures Trading Commission, told Fortune that crypto firms that hire experts remain at a disadvantage compared to traditional financial firms, which typically have separate departments. who have performed compliance related work for decades.

Even if Coinbase tried to comply with DFS, it may not matter for the struggling industry or Coinbase, which has seen its share price drop nearly 90% since November 2021.

With FTX collapsing, Cooper said regulators will increase their focus on the crypto industry, whether poor results are the result of fraud or incompetence.

The reality is that perception matters in politics and policy-making more sometimes than reality, he told Fortune. Crypto currently suffers from a significant cultural problem.

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