Coinbase just reached a $100M settlement with New York regulators. Here’s what that means for crypto

As an industry predicated on privacy and anonymity, crypto companies have a long history of running afoul of anti-money-laundering and “know your customer” laws. Still, Coinbase has positioned itself as the law-abiding citizen amid a crowded field of exchanges that includes dubious companies like Binance and imploding firms like FTX. Regulatory experts told Fortune that the Coinbase settlement reveals the growing target on the backs of crypto heavyweights, even those seeking to play by the rules.

“DFS is the apex predator when it comes to crypto regulation,” said Eric Soufer, the head of the crypto and fintech practice at Tusk Strategies and a former senior adviser to two New York attorneys general. 

Unlike other states leading the charge on crypto enforcement, such as Texas and Alabama, Soufer said New York has a comprehensive set of crypto-specific regulations and experts. While the attorney general’s office handles enforcement for non-registered companies, like settlements with Bitfinex and Tether, DFS can bring actions against companies with New York licenses, such as Robinhood.  

Coinbase received a license from DFS to operate in New York as a virtual currency business and money-transmitting business in 2017. In 2020, DFS declared Coinbase’s compliance program inadequate, with the company treating customer onboarding requirements as a simple check-the-box exercise and a backlog of 100,000 unreviewed transactions, according to the department.

Even though Coinbase agreed to hire an independent consultant, it was not sufficient to meet the agency’s requirements. Regulators opened a formal investigation in 2021—a fact noted in Coinbase’s 2021 10-K—culminating in the Jan. 4 settlement. Coinbase will pay a $50 million penalty to New York State and has agreed to invest an additional $50 million in compliance.

“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,” Coinbase chief legal officer Paul Grewal wrote in a company post published Wednesday.  

The tradeoffs of regulation

Soufer said the nine-figure settlement, however many headlines it grabs, won’t change the fundamentals for Coinbase or its financial stability.

“Coinbase made the decision that there was long-term value in being regulated,” he told Fortune. “Every company regulated by DFS understands that there are going to be some tradeoffs.”

Because of the nascent nature of crypto, Soufer said, even compliant companies are still struggling with AML and KYC laws due to the difficulty of finding outside vendors and experts to help provide the requisite expertise or resources. An example is the recent push for exchanges to complete proof-of-reserve audits and the reluctance of accounting firms to get involved. 

Charley Cooper, managing director at blockchain firm R3 and a former chief of staff at the Commodities Futures Trading Commission, told Fortune that the crypto companies hiring experts remain disadvantaged compared with traditional financial firms, which typically have entire departments that have done related compliance work for decades.

Even if Coinbase was attempting to comply with DFS, it may not matter for the embattled sector or Coinbase, which has seen its stock price decrease by almost 90% since November 2021.  

With the collapse of FTX, Cooper said regulators will increase their attention on the crypto industry, regardless of whether bad outcomes result from fraud or incompetence.

“The reality is, perception matters in politics—and in policymaking—more sometimes than reality,” he told Fortune. “Crypto is suffering from a significant cultural problem right now.”