UK fines Coinbase £3.5M for ‘repeated and material breaches’ of financial crime controls

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Coinbase (NASDAQ: COIN) has been fined £3.5 million (US$4.5 million) by the U.K.’s financial watchdog for ignoring anti-money laundering (AML) requirements, even after the digital asset exchange was expressly warned to step up its game.

On July 25, the Financial Conduct Authority (FCA) announced its first enforcement action against a firm “enabling cryptoasset trading.” The FCA imposed the £3.5 million (US$4.5 million) penalty on Coinbase’s U.K. subsidiary for “repeatedly breaching a requirement that prevented the firm from offering services to high-risk customers.”

CB Payments Limited (CBPL) is a Coinbase offshoot that’s “not currently registered to undertake cryptoasset activities in the UK.” Instead, CBPL is an Authorized Electronic Money Institution (AEMI) that enables customers to deposit fiat cash into e-money wallets which can then be used to purchase and exchange tokens via other Coinbase entities.

In February 2020, the FCA visited CBPL and identified “significant weaknesses and gaps in [CBPL’s] financial crime control framework.” That October, CBPL entered into a voluntary requirement (VREQ) that barred the firm from taking on new high-risk customers until it addressed the FCA’s concerns.

Over the next three years, CBPL onboarded nearly four million customers, including 13,416 meeting the FCA’s ‘high-risk’ criteria. These forbidden customers deposited tens of millions of dollars that were “used to make withdrawals and then execute multiple cryptoasset transactions via other Coinbase Group entities, totalling approximately US$226 million.”

The FCA slammed CBPL’s “lack of due skill, care and diligence in the design, testing, implementation and monitoring of the controls put in place to ensure that the VREQ was effective. This included failing to consider all of the various ways in which customers might be onboarded when designing the controls. Because of inadequacies in the initial monitoring of compliance with the VREQ, repeated and material breaches went undiscovered for almost two years.”

In a statement announcing the penalty, FCA enforcement director Therese Chambers said the “money laundering risks associated with crypto are obvious and firms must take them seriously… CBPL’s controls had significant weaknesses and the FCA told it so… CPBL, however, repeatedly breached those requirements. This increased the risk that criminals could use CBPL to launder the proceeds of crime.”

CBPL’s fine would have been 30% higher had it continued to ignore the FCA’s shots across its bow. The FCA noted this was the first action against a ‘crypto’ firm under the Electronic Money Regulations 2011. However, it’s unlikely to be the last, given that Chambers said the FCA “will not tolerate such laxity, which jeopardises the integrity of our markets.”

This is Coinbase’s first trip to the U.K.’s regulatory woodshed, but not its first European legal dustup. Last year, Coinbase was hit with a €3 million ($3.3 million) penalty by Dutch regulators for operating in the Netherlands without the necessary permits.

That penalty followed a $100 million judgment in the state of New York for “wide-ranging and long-standing failures” in Coinbase’s AML, ‘know your customer’ (KYC), due diligence, transaction monitoring, and suspicious activity reporting (SAR) systems. Two years prior, the U.S. Commodity Futures Trading Commission (CFTC) fined Coinbase $6.5 million for “reckless, false, misleading or inaccurate reporting” on its ‘professional’ trading platform.

It’s worth remembering that Coinbase executives are among the loudest of the ‘crypto bros’ perpetually bemoaning the alleged lack of ‘regulatory clarity.’ The FCA penalty makes it plain that the only clarity Coinbase truly seeks is the all-clear to continue doing what makes it the most money and anything that dares interfere with that is an affront to its vision of itself as financial unicorn.

Strange bedfellows

On July 25, Coinbase announced three additions to its board of directors, including Chris Lehane, a veteran of tech-focused firms such as Airbnb, OpenAI and Haun Ventures. But Lehane is also a prominent Democratic party strategist, including a stint as a former aide to President Bill Clinton.

Coinbase’s Chief Legal Officer Paul Grewal said Lehane’s input “will be essential as Coinbase continues to engage stakeholders across party lines from all branches of government on the need for bipartisan, pro-crypto policies.” Lehane was already a member of Coinbase’s global advisory council, but his board seat offered a counter to the mantra that the entire ‘crypto’ sector wants to see Donald Trump back in the White House.

Lehane, who was already advising the “crypto-focused” Fairshake political action committee—Coinbase has contributed $46.5 million of the $161 million Fairshake has raised to date—told Politico that “there was a need to begin to think about how [the crypto sector was] going to engage in and play politics consistent with how it is played in this day and age.”

Fairshake’s spending to date has targeted candidates on both sides of the U.S. political divide that aren’t sufficiently “pro-crypto,” but the PAC’s other contributors haven’t exactly been shy about who they want to see triumph in November.

Kraken Co-Founder Jesse Powell and the Winklevoss twins behind the Gemini exchange have all personally donated around $844,000 apiece to Trump’s campaign. Marc Andreessen and Ben Horowitz—whose a16z venture capital group contributed $44 million to Fairshake—revealed last week that they, too, were firmly in the tank for Trump.

Trump is scheduled to speak at this weekend’s BTC shindig in Nashville, which will feature a number of other prominent Republicans as guest speakers, including Senators Cynthia Lummis (R-WY), Marsha Blackburn (R-TN) and Bill Hagerty (R-TN), as well as former GOP presidential candidate Vivek Ramaswamy.

Vice President Kamala Harris, who recently replaced Joe Biden as the Democrats’ 2024 candidate, was reportedly invited to the conference but decided against appearing. Conference organizer David Bailey didn’t hide his disdain in tweeting this news, saying, “It would have been a disaster for her,” adding that the “choice is simply really, Trump Pump or Biden Dump?” Subtle, they’re not.

Focused on their Base

Political-themed memecoins (BODEN, MAGA, DJT, TREMP, KAMA, etc.) have been all the rage this year, with tokens soaring or swooning based on whatever’s in the news cycle. Such utility-free memecoins have fueled the growth of Base, Coinbase’s proprietary Ethereum Layer 2 network, even though a significant portion of these utility-free tokens is ultimately revealed to be scams.

Base is now the platform on which anyone can make ‘crypto’ donations to any candidate who has signed up to participate in this ‘make it reign’ process. Donations can be made using over 240 different tokens, including some really illiquid ones, after which the poor candidates are required to find some sucker willing to trade the digital Beanie Babies for real cash to pay for things in the real world.

Base launched a year ago but Coinbase remains the only ‘sequencer’ aka transaction validator on Base, despite Coinbase pledging that it will allow other sequencers “over time.” But with Coinbase generating $56 million in revenue from Base transactions in Q1—and with around a million new memecoins having launched on Base since April 1—don’t expect Coinbase to share this pie anytime soon.

Frankly, if being allowed to continue making bank off idiots throwing dice in a rigged casino is one of the “pro-crypto policies” that Coinbase is pushing legislators to implement, people should understand that the only winners Coinbase really cares about are themselves.

Know when to fold ’em

Among Coinbase’s other new board appointments is powerhouse attorney Paul Clement, a former U.S. solicitor general who will “advise Coinbase’s efforts to push back against the [Security and Exchange Commission’s] overreach and fight for clear rules of the road for digital assets.”

Speaking of, there was another development this week in Coinbase’s legal squabble with the SEC over whether the exchange operated as an unregistered securities exchange, broker, and clearing agency. Coinbase previously sought to obtain a host of documents—including SEC Chairman Gary Gensler’s personal emails from both before and after he joined the SEC—that the exchange claimed the SEC refused to turn over.

Coinbase’s demands were met with skepticism by U.S. District Judge Katherine Polk Failla, who said during a hearing earlier this month that she “was just not moved by basically any of the arguments” put forth by Coinbase’s attorneys. Last week, the exchange’s attorneys narrowed their requests to emails and communications specifically related to Gensler’s time at the SEC.

This week, Coinbase filed a new motion accusing the SEC of refusing to search their archives “outside of a self-selected group of Enforcement Division investigatory files.” Coinbase also accused the SEC of refusing to ask Gensler “whether he used his personal email for communications about his public statements on these subjects that he said were made in his personal capacity.”

Coinbase wants Failla to order the SEC “to run the preliminary search that Coinbase proposed, to be supplemented to address the categories in this motion, and to produce or log relevant documents.” Coinbase’s Grewal likened this undesirable situation to “trying to play Texas Hold’ Em with all the cards face down.”

That sucks, Paul… guess being in a rigged casino is only fun when you’re the house, huh?

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