Coinbase stock gets a much-needed boost after it settles lawsuit with NY regulators

A lax approach to compliance is costing one of the biggest crypto exchanges in the country some serious coin.

Coinbase, easily one of the best-known cryptocurrency exchanges in the United States, has reached a $50 million settlement with New York State regulators after it was found that the company had allowed users to open accounts without conducting thorough background checks, among other things.

In short, Coinbase appears to have been unable to keep up with the influx of new users and customers given the growth in the crypto industry in recent years, and still isn’t working fast enough to flag and investigate suspicious user activity.

These “significant failures in its compliance program,” as the New York State Department of Financial Services (DFS) calls them in a release, opened up Coinbase’s platform to “serious criminal conduct, including, among other things, examples of fraud, possible money laundering, suspected child sexual abuse material-related activity, and potential narcotics trafficking.”

News of the settlement did, however, offer a much-needed boost to the company’s stock. Shares were up more than 13% during midday trading on Wednesday. Coinbase, like many other tech companies, has seen its shares lose significant value since the end of 2021.

In addition to paying a $50 million penalty to the State of New York, Coinbase has also agreed to beef up its compliance operations with an additional $50 million investment over the next couple of years. The company will also continue to work with an independent monitor to overlook its compliance operations, which it had been ordered to do last year.

“Coinbase failed to build and maintain a functional compliance program that could keep pace with its growth,” DFS superintendent Adrienne A. 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 added that the department’s consumer-protection expectations are “just as stringent for cryptocurrency companies as they are for traditional financial services institutions.”

Coinbase was first granted a license to operate in New York back in 2017, and its compliance issues were first flagged as far back as 2018. Coinbase, in a blog post published today, says that the company “took NYDFS’s concerns seriously,” and over the past couple of years, has implemented a number of fixes to shore up its systems.

“Coinbase has taken substantial measures to address these historical shortcomings and remains committed to being a leader and role model in the crypto space, including partnering with regulators when it comes to compliance,” says Paul Grewal, Coinbase’s chief legal officer, in a statement provided to Fast Company. “We believe our investment in compliance outpaces every other crypto exchange anywhere in the world, and that our customers can feel safe and protected while using our platforms.”

While Coinbase is owning up to its shortcomings and making investments to put things in proper order, today’s news does come as yet another blow to the crypto industry, which is still reeling from an ongoing “crypto winter” and the collapse of FTX. The industry is waiting for federal regulators to produce guidelines and rules—a process that has been started by the Biden administration—but the space remains largely unregulated.