The world of cryptocurrency has seen its fair share of regulatory challenges, and the latest episode involves the UK subsidiary of the prominent crypto exchange, Coinbase. The Financial Conduct Authority (FCA), the UK’s financial watchdog, has levied a substantial £3.5 million ($4.5 million) fine on CB Payments Limited (CBPL), Coinbase UK-based entity, for repeatedly violating a voluntary agreement aimed at curbing the onboarding of high-risk customers. This landmark enforcement action underscores the growing emphasis on compliance and the need for crypto firms to prioritize robust financial crime controls.
Coinbase UK Voluntary Agreement with the FCA
In October 2020, CBPL, the Coinbase subsidiary responsible for facilitating crypto trading in the UK, entered into a voluntary agreement with the FCA. This agreement was intended to address the regulator’s concerns regarding the effectiveness of CBPL’s financial crime control framework. As part of the agreement, CBPL committed to restricting the onboarding of new customers deemed “high-risk” by the FCA until the identified issues were resolved.
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Breaching the Voluntary Agreement
However, despite the voluntary agreement, the FCA’s investigation revealed that CBPL had repeatedly breached the restrictions. The regulator found that CBPL had onboarded and provided e-money services to a staggering 13,416 high-risk customers. Alarmingly, around 31% of these customers had deposited a total of approximately £19.3 million ($24.9 million), which was then used to execute multiple cryptocurrency transactions through other Coinbase entities, amounting to roughly £175 million ($226 million).
Significant Weaknesses in CBPL’s Controls
The FCA’s joint executive director of enforcement and market oversight, Therese Chambers, emphasized the gravity of CBPL’s failings. “CBPL’s controls had significant weaknesses, and the FCA had already pointed this out, which led to the implementation of these requirements. Nevertheless, CBPL continually violated these requirements,” she stated. The regulator’s findings highlighted CBPL’s lack of skill, care, and diligence in developing, testing, and overseeing the controls designed to enforce the voluntary agreement.
Increased Risk of Money Laundering
The FCA’s investigation also revealed that CBPL’s compliance shortcomings had significantly increased the risk of criminal activities, including money laundering, on the platform. Chambers warned that the “money laundering risks associated with crypto are obvious, and firms must take them seriously.” She stressed that firms like CBPL, which enable cryptocurrency trading, need to have robust financial crime controls in place to mitigate such risks.
The FCA’s Enforcement Action
The £3.5 million fine imposed on CBPL marks the first time the FCA has used its enforcement powers under the Electronic Money Regulations 2011. This action sends a clear message to the cryptocurrency industry that regulatory compliance is not optional, and firms that fail to prioritize financial crime controls will face severe consequences.
Coinbase’s Response and Commitment to Compliance
In response to the FCA’s findings, Coinbase acknowledged the regulator’s concerns and reaffirmed its commitment to regulatory compliance. The company stated that CBPL continues to proactively enhance its control systems to ensure compliance with its regulatory obligations. Coinbase also noted that the FCA had recognized CBPL’s cooperation during the investigation.
Unintentional Onboarding of High-Risk Customers
Interestingly, CBPL clarified that the onboarding of high-risk customers was “unintentional,” accounting for only 0.34% of the total new customers signed up between October 30, 2020, and October 1, 2023. The company stressed that it takes the FCA’s findings and its broader regulatory compliance very seriously, and is working to further strengthen its control mechanisms to prevent future breaches.
Impact on Coinbase’s Stock
The news of the FCA’s enforcement action against CBPL had an immediate impact on Coinbase’s stock. On the day the fine was announced, Coinbase Global shares closed down approximately 5.5% at $231.52, reflecting the market’s concern over the regulatory challenges faced by the exchange’s UK subsidiary.
Conclusion
The FCA’s enforcement action against Coinbase’s UK subsidiary serves as a stark reminder that regulatory compliance is not optional in the cryptocurrency industry. Firms that fail to prioritize financial crime controls and adhere to regulatory requirements will face severe consequences, as evidenced by the £3.5 million fine imposed on CBPL. This case highlights the importance of proactive compliance efforts, transparent communication with regulators, and a steadfast commitment to maintaining the integrity of the crypto market.
Disclaimer: The information provided in this article is for informational purposes only and does not constitute financial advice. Investing in cryptocurrencies involves risks, and readers should conduct their own research and consult with financial advisors before making investment decisions. Hash Herald is not responsible for any profits or losses in the process.
