Loyola University Chicago School of Law, J.D. 2024
On January 4th, 2023, the New York State Department of Financial Services made public that a $100 million settlement with the cryptocurrency exchange Coinbase Global Inc. (Coinbase) has been agreed to. The settlement follows an enforcement action imposed this past August aiming to regulate cryptocurrencies. With a lot of discussion happening given the recent collapse of FTX and anti-money laundering violations by Robinhood Markets, this action begs the question: should the digital currency industry be regulated nationwide and, if so, what should these regulatory agendas look like?
What happened with Coinbase?
On January 4, 2023, Superintendent of the New York Department of Financial Services (NYDFS) Adrienne Harris announced that Coinbase will pay a $50 million penalty to settle allegations that the cryptocurrency exchange violated national anti-money laundering laws. An NYDFS investigation found “wide-ranging and long-standing failures in Coinbase Global Inc.’s Anti-Money Laundering Program, including concerning its…customer due diligence, transaction monitoring, and suspicious activity reporting systems.” Superintendent Harris stated that Coinbase failed to maintain a functional and adequate compliance program that could keep up with its growth. As a result, Coinbase has also pledged to invest an additional $50 million in its Compliance Program in order to improve its oversight processes over the span of the next few years.
NYDFS used an unusual method to evaluate and work with Coinbase to fix longstanding issues by installing an independent monitor at the company in early 2022. This monitor will continue remediation efforts with Coinbase for the next year. In the last year, Coinbase has implemented a stronger onboarding process, hired new senior leaders within its legal and financial crimes compliance functions department, and a dynamic risk rating model for retail and institutional customers complete with processes to review them periodically.
Where’s the regulation?
Ultimately this settlement follows various struggles seen in the crypto industry such as the collapse of FTX and Genesis to name a few. Many people are demanding strict regulations in this industry to help discourage wrongdoing. With these catastrophes happening so frequently within the crypto industry, it is evident that more regulations are needed. For example, global bankers including Colm Kelleher, chairman of UBS, Jane Fraser, the CEO of Citi, Tharman Shanmugaratnam, senior minister of Singapore, and Francois Villeroy de Galhau, the governor of the central bank of France, gathered and articulated the need for crypto regulation as part of the 2023 Davos meetings of the World Economic Forum. Mr. Chanmugaratnam compared cryptocurrency and banks stating that crypto is designed to offer similar services to banks and thus they should be regulated the same as these financial institutions.
NYDFS Superintendent Adrienne Harris echoed the same sentiments during her interview with the Wall Street Journal. Harris stated that this [regulation and subsequent compliance] is not a mindless, “check-the-box exercise”; regulation of this space will take serious work. She continued, “show us that you are equipped to manage the risk of the products you are offering; show us that you have the right consumer disclosures.” Harris hopes that the national regulatory agenda will follow the important work that her state agency has done in the past year.
Another important stakeholder when discussing possible regulations of cryptocurrency is the U.S. Securities and Exchange Commission (SEC). SEC Chair Gary Gensler stated that the top five exchanges account for about 99% of current cryptocurrency trading and likely involve trading securities. He believes that these exchanges should have to register with the SEC and comply with regulations that other traditional securities firms registered with the agency adhere to. In May of 2022, the SEC announced that they planned to increase the staff specifically targeted at crypto regulations. Just like the NYDFS settlement, the SEC has had its share of settlements with crypto exchanges. These settlements exhibit the growing acceptance of crypto firms by the SEC and the shift to compliance with securities laws.
Chairman Gary Gensler states that he wants the agency to extend to crypto the same investor protections that lead to the success of the United States securities markets. In the coming years, we will see how new regulations help lead the agency to its goals. As we have seen with the incidents happening within the industry, regulation is needed to make sure consumer protection is paramount. Further, compliance structures need to be set and monitored so that greed by wealthy individuals in the industry is discouraged.