The Importance of Being Compliant

On January 4, 2023, Coinbase Inc., a leading US-based cryptocurrency exchange, reached a $100 million settlement with the New York State Department of Financial Services (NYDFS) for failing to establish and maintain an effective compliance program. The settlement results from an investigation by the NYDFS that found multiple compliance shortcomings at Coinbase between 2018 and 2019.

Compliance Shortcomings at Coinbase

Adrienne Harris, the NYDFS Superintendent, clarified that the department's expectations for consumer protection, cybersecurity, and anti-money laundering programs are just as stringent for cryptocurrency companies as they are for traditional financial services institutions.

And in this case, Coinbase’s compliance program, including its know your customer/customer due diligence (KYC/CDD) program, transaction monitoring, suspicious activity reporting, and sanctions compliance systems, were found to be “inadequate for the [company’s] size and complexity” between 2018 and 2019.

Lapses highlighted by the NYDFS included immature and inadequate documentation and implementation of their KYC/CDD program, lax onboarding procedures, and drawn-out transaction monitoring. The settlement requires Coinbase to pay a $50 million penalty and invest an additional $50 million to strengthen its compliance capabilities.

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Navigating a Rapidly Evolving Regulatory Landscape

It's important to note that this settlement with Coinbase is the latest example of how regulators pay increased attention to the digital asset landscape. Following regulatory action against companies such as BlockFi , Robinhood, and Bitrex -- it's clear that companies within the crypto industry must take compliance seriously.

But how can crypto asset companies navigate this rapidly evolving regulatory landscape? The answer lies in having a global, agile, and adequately staffed compliance program. Crypto asset companies must contend with a rapidly evolving regulatory landscape and ensure that their policies, procedures, and controls are designed to interpret and address the most current requirements in multiple jurisdictions. This is largely dependent on establishing, maintaining, and scaling the compliance, audit, and reporting functions that can keep pace with customer activity and transaction volume.

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The Importance of Long-term Stability in the Crypto Industry

Another important aspect to consider is prioritising long-term stability over short-term gains. As the crypto industry continues to evolve and advance, it's vital for companies to remember that while the temptation to offer a wider range of products and services at lower prices may boost a company's client base and financial status in the short term, it ultimately comes at the cost of long-term stability. This concept is well-known in business and finance. Even legendary investor Warren Buffet has noted:

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

In other words, focusing on long-term success and stability is crucial for companies to thrive in the ever-evolving crypto landscape. The key to success in the crypto industry lies in finding a balance between growth and stability and always prioritising the company's long-term health over short-term gains.

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Making the Commitment to Compliance

The cryptocurrency industry is at an inflection point, and every public move by a crypto company will receive intense scrutiny. Companies must be committed to compliance and work with regulators to ensure long-term stability and success for the industry.

This is not the first time a company has fallen afoul of regulators for non-compliance, and the trend is unlikely to change. Crypto companies must learn from past mistakes and stay on the right side of the law to protect both the company and its customers. The recent settlement between Coinbase and NYDFS highlights the importance of compliance in the crypto industry.

The rapidly evolving regulatory landscape makes compliance a complex and challenging task, but protecting both companies and their customers is essential. It is important for companies to prioritise long-term stability over short-term growth and work closely with regulators to ensure compliance and success for the industry.