Coinbase to pay $100 million to resolve New York investigation of due-diligence lapses

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State says a former child predator and a corporate embezzler were able to conduct transactions on the platform undetected.

Coinbase to pay $100 million to resolve New York investigation of due-diligence lapses

Monitors display Coinbase signage during the company's initial public offering at the Nasdaq MarketSite in New York on April 14, 2021.Michael Nagle / Bloomberg via Getty Images fileLink copiedJan. 4, 2023, 3:24 PM UTCBy Rob Wile

Popular cryptocurrency exchange Coinbase announced an agreement Wednesday to pay $50 million to resolve a New York investigation into lapses concerning its anti-money laundering and know-your-customer practices.

The company said it would invest an additional $50 million to improve on those programs.

One of the few crypto exchanges headquartered in the U.S. and regulated by state financial statutes, Coinbase saw explosive growth during the pandemic as the price of bitcoin soared to more than $60,000. But by the end of 2021, Coinbase had a backlog of more than 100,000 unreviewed transaction monitoring alerts and 14,000 customers requiring enhanced due diligence procedures, according to New York regulators.

“Coinbase failed to build and maintain a functional compliance program that could keep pace with its growth," New York Department of Financial Services (NYDFS) superintendent Adrienne Harris said in a statement. "That failure exposed the Coinbase platform to potential criminal activity requiring the Department to take immediate action including the installation of an Independent Monitor,” Harris said.

NYDFS cites two disturbing examples of how Coinbase's lapses led to real-world consequences. In one instance, a former Coinbase customer who had been criminally charged with crimes related to child sexual abuse material conducted suspicious transactions potentially associated with illicit activity on the exchange. Authorities said that activity occurred for more than two years before Coinbase discovered it.

Another customer was able to fraudulently identify themselves as an employee of an unnamed corporation. Having separately gained gained access to that corporation's bank account, the customer was able to transfer $150 million of the corporation's funds into a Coinbase account, convert the funds into crypto, and deposit the proceeds into their own personal crypto wallet. (Eventually, Coinbase discovered the activity and, alongside law enforcement, recovered the funds.)

In a statement on its website, Coinbase acknowledged the $100 million settlement and outlined other steps it was taking to address the lapses.

"We view this resolution as a critical step in our commitment to continuous improvement, our engagement with key regulators, and our push for greater compliance in the crypto space — for ourselves and others," the company said.

Rob Wile