Coinbase Settlement and the Slow Death of Crypto

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The cryptocurrency market crashed deeply in 2022, but cryptocurrencies persist. FTX, once valued at $32 billion, went bankrupt when its founder was arrested for carrying out one of the biggest frauds in history.

The market began to plunge after Celsius Network, a former cryptocurrency lending company, announced that it was suspending all withdrawals and transfers between accounts in order to “honour, over time, withdrawal obligations” . Celsius has nearly 2 million customers and holds over $10 billion in assets.

Stablecoins, a newer crypto innovation that was backed by another currency or commodity like the dollar or gold, also took a hit. The TerraUSD stablecoin has fallen from $116 in April to a fraction of a penny in 2022, when it once had a market capitalization of over $40 billion.

Core Scientific, one of the largest publicly traded crypto mining companies in the United States, which primarily manufactures bitcoin, filed for bankruptcy on Dec. 21, citing falling crypto prices and rising mining costs. ‘energy.

BlockFi, a cryptocurrency lender, filed for Chapter 11 bankruptcy in November, itself a victim of the collapse of FTX.

Overall, the crypto market has lost over $2 trillion in 2022 as popular digital coins drop huge percentages and the NFT market has become virtually worthless.

This all comes as regulators seek to tighten their grip on the Wild West of cryptocurrency. US regulators are working to better regulate crypto asset activities, with stricter consumer protection rules. A new EU supervisory authority, the Anti-Money Laundering Authority (AMLA), is also expected to become operational in 2023.

The crypto body may be legless, armless and pretend it’s just a scratch, but the upcoming AML regulations and recent enforcement actions are expected to launch the crypto body in 2023 and leave the carcass to the crows.

What is Coinbase Settlement?

Coinbase, a well-known crypto exchange, was fined $50 million by the New York State financial regulator and will invest another $50 million in its compliance function over the next two years. Coinbase violated New York banking law and New York State Department of Financial Services (DFS) regulations. In the wake of FTX’s bankruptcy in November and the arrest of its founder, Sam Bankman-Fried.

The Coinbase settlement also comes a day after the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation released a joint statement on the impact the agencies believe crypto could have on the financial industry.

“Given the significant risks highlighted by the recent failures of several large crypto-asset companies, the agencies continue to take a careful and cautious approach to current or proposed crypto-asset-related activities and exposures in each organization. banking.”

New York regulators said the cryptocurrency exchange’s compliance program makes it “vulnerable to serious criminal behavior, including but not limited to instances of fraud, possible money laundering, suspected child sexual abuse activity and potential drug trafficking”.

What was wrong with Coinbase?

Given the size and scale of Coinbases operations, regulators have found that it has failed to establish and maintain a functional, risk-based compliance program that could keep pace with his growth. Essentially, it failed to consider compliance in the context of the business, what it was aiming for and, in particular, growth and expansion.

Because of this lack of risk-based due diligence, Coinbase did not have enough procedures or staff to perform enhanced due diligence on the more than 14,000 high-risk customers who needed it. In general, they have treated customer onboarding as a simple tick-box exercise, usually failing to consider risk.

Their transaction monitoring systems were also unable to keep up with their growth and handle the volume of alerts generated by their systems. This left over 100,000 potentially suspicious transactions unreviewed for months. Given the huge backlog of surveillance transactions, there has been a ripple effect in reporting suspicious activity. Suspicions were routinely not investigated or reported, and some SARs were not filed until months after the initial suspicion was first raised.

The checkbox approach to onboarding has led to the absence of sanction compliance systems and PEP controls, the absence of an annual enterprise-wide risk assessment, the failure to report cybersecurity incidents and customers who could regularly use VPNs and other tools to hide their true identity. location.

All in all, a disastrous failure of compliance. One that is of particular concern for a regulated industry like cryptocurrency providers.

What does the Coinbase settlement mean for crypto?

With the collapse of FTX and the Coinbase settlement, its clear regulators are cracking down on cryptocurrency. Whatever its initial designs and supposed benefits, the reality is that cryptography is a volatile financial product that criminals are increasingly relying on to facilitate money laundering, terrorist financing and crime financing. proliferation.

Beyond that, as the collapse of FTX has shown, it is rather irrelevant that crypto is the method by which some very bad actors rip off and deceive investors.

David Yermack, professor of finance at NYU, said of FTX:

The fact that they were trading crypto is kind of beside the point. They could have traded real estate or stocks and bonds or whatever. They had no accounting, no internal controls, they were very irresponsible with the money entrusted to them by their clients.

The fundamental problem with cryptocurrency is that no real wealth is created by the people buying and selling it. Even something like NFTs, which are supposed to have correlations with the art market, have very low barriers to entry. No great skill or technique is required to create an NFT, so the value is not tied to something tangible like a traditional art market.

As the crypto market continues to experience high volatility, those still investing in it will become increasingly desperate to offload their declining assets, and the entire industry becomes an even bigger target for nefarious actors. . They can buy crypto assets from sellers who are in desperate need of cash and then launder those assets around the world.

Australian regulator AUSTRAC has already come out and said that traditional forms of money laundering have been replaced by cryptocurrencies. Intelligence chief John Moss has raised concerns about the growing use of crypto ATMs, even regulated ones, and vulnerable people being used as mules to put large amounts of cash in them, which is then quickly moved in the whole world.

Since these ATMs are also key integration points for criminal gangs in Venezuela and El Salvador, this year may be the time to properly consider the use of cryptocurrency as a major red flag.

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