Threat of Crypto Contagion Risk, US Regulators Warn as New Scandal Hits

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US cryptocurrency exchange, Coinbase, has been fined $50 million ($41 million) by regulators for repeated anti-money laundering failures.

The failures left the exchange vulnerable to serious criminal behavior, including instances of fraud, possible money laundering, suspected child sexual abuse activity and potential narcotics trafficking, the regulator said. , the New York State Department of Financial Services (NYSDFS).

Coinbase, once the world’s second-largest cryptocurrency exchange, debuted on the US stock exchange in April 2021. It now has to spend an additional $50 million over the next two years to improve its compliance services as it hadn’t performed enough background checks, the regulator found.

It obtained a license from NYSDFS to allow customers to trade cryptocurrency on its platform in 2017, but the government department said it had since found compliance measures to be inadequate for an exchange of its own. cut.

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It is critical that all financial institutions protect their systems from bad actors, and regulatory expectations around consumer protection, cybersecurity, and anti-money laundering programs are equally stringent for cryptocurrency companies. currency than for the traditional financial services institution, Adrienne Harris, NYSDFS Superintendent, said.

Coinbase failed to create and maintain a functional compliance program that could keep pace with its growth. This failure exposed the Coinbase platform to potential criminal activity, she added.

The company acknowledged its failures, saying: We have taken the NYSDFS concerns seriously and have taken substantial steps to address these historic shortcomings.

The sanction is yet another setback to the credibility of the crypto industry, which has been struggling since the collapse of crypto exchange FTX, hedge fund Three Arrows Capital and other groups.

This followed an unprecedented joint statement by three major US federal regulators on crypto.

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The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) have said US banks need to be more careful about the risks of fraud, legal uncertainty and misleading disclosures by crypto companies. They added that they are concerned about the safety and soundness of banking business models heavily concentrated in crypto.

The Federal Reserve, FDIC, and OCC have highlighted the risks associated with crypto, including volatility in digital asset markets, the risk of contagion within the industry, and poor risk management.

Banks issuing or holding crypto tokens stored on decentralized public networks are very likely to be inconsistent with safe and sound banking practices, regulators added, potentially dealing a blow to ongoing efforts by several lenders to provide services. crypto to customers.

The statement comes after months of reluctance by regulators to issue uniform cryptocurrency guidelines or rules, even as banks have expressed a desire for more clarity.

Regulators said they were monitoring banks that may be exposed to crypto-related risks and reviewing banks’ proposals to engage in crypto business, according to the joint statement.

It is important that risks in the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system, regulators said.

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