The New York State Department of Financial Services highlighted its intention to set the regulatory agenda for digital currencies with a $100 million settlement made public on Wednesday. This boosted Coinbase shares by 5%.
Coinbase Global Inc., a cryptocurrency exchange, is regulated by the Securities and Exchange Commission. To resolve accusations that it breached anti-money-laundering regulations by enabling consumers to open accounts without conducting adequate background checks, it agreed to pay a $50 million fine. Moreover, Coinbase’s compliance effort will be enhanced by $50 million over the next two years.
In an interview with The Wall Street Journal in October, NYDFS Superintendent Adrienne Harris said she aims to use the state’s position as a financial-services leader to help set the regulatory agenda nationwide. There was a particular emphasis on bringing order to the cryptocurrency industry.
The regulator already has an outsize role in the financial services industry and oversees insurance companies and state-chartered banks.
What Are the Security Vulnerabilities, According To NYDFS?
In August, NYDFS took action against Robinhood Markets Inc.’s cryptocurrency trading unit, imposing an enforcement action. Last month, the Treasury Department issued guidance asking banks to seek approval before venturing into cryptocurrencies. Additionally, they asked for more attention to alleged breaches of anti-money laundering and cybersecurity rules.
NYDFS found that Coinbase had long-standing deficiencies with its anti-money laundering compliance program. It noted that the publicly traded crypto exchange had an inadequate compliance program for a firm of its size and complexity. This is more relevant, especially since it received its New York license in 2017.
Coinbase’s customer onboarding process, transaction monitoring system, and suspicious activity reporting system are among the vulnerabilities in the settlement agreement, according to NYDFS.
According to the organization, Coinbase could not keep up with the expansion of alerts generated by its transaction monitoring system. This system detects potential suspicious activities. Moreover, it had a backlog of more than 100,000 unreviewed alerts by late 2021. According to the agency, this caused Coinbase to miss deadlines for investigating and reporting suspicious transactions.
What Were Some of The Prior Efforts to Monitor the Exchange?
NYDFS wants to examine and collaborate with Coinbase on resolving the existing problems. Hence, it claimed it put an independent monitor in place in early 2022. NYDFS chose the monitor, which will continue to operate with Coinbase for another year. Adding up, they have the opportunity to extend that period if desired.
According to the agreement, the firm credited Coinbase for its corrective actions, which included improving its onboarding procedure. For retail and institutional customers, Coinbase now has a dynamic risk rating mechanism that it reviews regularly. Coinbase has recruited new senior leaders and people in its legal and financial crimes compliance departments.
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