Coinbase to Pay $100 Million After Crypto Probe Finds Compliance Flaw

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A disastrous year for cryptocurrencies culminated with the infamous November 2022 collapse of the now bankrupt FTX exchange.

The rapid fall of FTX had devastating effects on the entire crypto-asset industry and led to several other bankruptcies.

Sam Bankman-Fried, the former CEO of FTX, after a series of revelations and legal actions, ended up pleading not guilty to fraud and other charges on January 3.

Three federal agencies (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) even issued a joint official statement warning banks of crypto risks, also on January 3.

Cryptocurrencies, in general, had previously been marred by speculation that they are often used by criminals for illegal purposes such as money laundering, fraud, and human and drug trafficking.

A blog post from the European Central Bank in November suggested that Bitcoin (~BTCUSD) was a currency for nefarious activity.

“Bitcoin’s conceptual design and technological shortcomings make it a questionable means of payment: real bitcoin transactions are cumbersome, slow, and expensive. Bitcoin has never been used in any significant way for legal transactions in the real world,” indicates the blog.

Coinbase settles with New York regulators

Linked to accusations of fraudulent uses of cryptocurrency, the American exchange Coinbase Global (COIN) – Get Free Report has been investigated by the New York State Department of Financial Services and has settled on January 4 for $100 million.

Half of this amount is a fine, and the remaining $50 million will be used by Coinbase to improve its compliance practices.

Adrienne A. Harris, Superintendent of Financial Services, announced the settlement in a press release, saying Coinbase’s compliance program failures violated New York laws and regulations.

The department says the failures left the Coinbase platform vulnerable to serious criminal behavior. This includes fraud, money laundering, suspected child sexual exploitation activities and potential narcotics trafficking, according to the press release.

“It is essential that all financial institutions protect their systems from bad actors, and the Department’s expectations for consumer protection, cybersecurity and anti-money laundering programs are equally stringent for security companies. cryptocurrency than for traditional financial services institutions,” says Harris.

“Coinbase failed to build and maintain a functioning compliance program that could keep pace with its growth,” she continued. “This failure exposed the Coinbase platform to potential criminal activity requiring the Department to take immediate action, including installing an independent monitor.”

Risks Federal Agencies See for Banks

The January 3 statement issued by the Fed, FDIC and OCC warning banks of the risks noted the difficulties faced by the crypto sector. Several key risks associated with crypto-assets are listed in the statement.

These dangers, he said, were demonstrated by volatility and vulnerabilities in 2022. Here is the list of risks listed in the statement:

Risk of fraud and scams among players in the crypto-asset industry. Legal uncertainties related to custody practices, redemptions and property rights, some of which are currently the subject of legal proceedings. Inaccurate or misleading statements and disclosures by crypto-asset companies, including misrepresentations regarding federal deposit insurance and other practices that may be unfair, misleading or abusive, contributing to material harm to retail investors and institutions, clients and counterparties. Significant volatility in crypto-asset markets, the effects of which include potential impacts on deposit flows associated with crypto-asset companies. Susceptibility of stablecoins to risk, creating potential deposit outflows for banking organizations that hold reserves of stablecoins. , investing, financing, serving ice and operational arrangements. These interconnections can also present concentration risks for banking organizations exposed to the crypto-asset sector. Risk management and governance practices in the crypto-asset sector showing a lack of maturity and robustness. similar networks or systems, including, but not limited to, lack of governance mechanisms establishing system oversight; lack of contracts or standards to clearly establish roles, responsibilities and accountabilities; and vulnerabilities related to cyberattacks, failures, lost or trapped assets and illicit financing.

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