Key Points
- Coinbase’s UK arm, CB Payments Limited (CBPL), has been fined $4.5 million by the Financial Conduct Authority (FCA) for violating a voluntary agreement to prevent onboarding high-risk customers.
- This fine marks the first time the FCA has taken enforcement action under the Electronic Money Regulations 2011, potentially signaling increased scrutiny for cryptocurrency companies in the UK.
In a significant regulatory action, the Financial Conduct Authority (FCA) has fined the UK arm of cryptocurrency exchange Coinbase $4.5 million (£3.5 million) for violating a voluntary agreement aimed at preventing high-risk customers from being onboarded. This move highlights the increasing scrutiny faced by crypto companies in the United Kingdom and could signal a broader crackdown on the industry.
The Violation
CB Payments Limited (CBPL), a subsidiary of Coinbase Group, entered into a voluntary agreement with the FCA in October 2020. This agreement was designed to limit the onboarding of new clients deemed “high-risk” by the regulator, reduce potential criminal activity on the platform, and mitigate money laundering risks.
However, the FCA’s investigation revealed that CBPL had “repeatedly breached” this agreement by onboarding and servicing 13,416 high-risk clients between October 30, 2020, and October 1, 2023. These customers, representing approximately 0.34% of all new clients during this period, were prohibited from receiving cryptocurrency services under the terms of the agreement.
Regulatory Response
Therese Chambers, joint executive director of enforcement and market oversight at the FCA, criticized CBPL’s management for their lack of control:
“CBPL’s controls had significant weaknesses, and the FCA told them so, which is why the requirements were needed. CPBL, however, repeatedly breached those requirements. This increased the risk that criminals could use CBPL to launder the proceeds of crime. We will not tolerate such laxity, which jeopardizes the integrity of our markets.”
The FCA emphasized that these compliance shortcomings increased CBPL’s risk of criminal activity, including money laundering. The $4.5 million fine underscores the regulator’s zero-tolerance approach towards violations that endanger market integrity.
A First for the FCA
This fine marks the first instance of the FCA taking enforcement action under the Electronic Money Regulations 2011. Crypto litigation attorney Kate Gee of Signature Litigation noted that this sanction sends a clear message to companies about the importance of financial crime management:
“Firms that fail to comply with operational restrictions or do not do enough to protect against financial crime will face scrutiny and enforcement action.”
Coinbase’s Response
Coinbase acknowledged the infractions and expressed its commitment to regulatory compliance. In a statement, the company said:
“CBPL unintentionally onboarded some customers between October 30, 2020, and October 1, 2023 (representing 0.34% of customers on-boarded) classified as high-risk under the terms of the VREQ. This led to the FCA’s investigation and subsequent action.”
The exchange emphasized that CBPL continues to improve its control systems to meet regulatory requirements and that the FCA acknowledged CBPL’s cooperation during the investigation.
Coinbase also clarified that the investigation focused on the firm’s e-money transmitter services, not on crypto asset transactions:
“CBPL has been authorized by the FCA since 2017 as an e-money institution and provides e-money and payment services to customers in certain jurisdictions. As a result, the FCA does not authorize CBPL to conduct crypto asset transactions for customers, and the FCA’s investigation did not examine any crypto asset transactions.”
Market Impact
The news of the fine immediately impacted Coinbase’s stock price, which declined nearly 2% following the announcement. At the premarket trading on Thursday, July 25, the price stood at $240.30.
Looking Ahead
This regulatory action could have far-reaching implications for the cryptocurrency industry in the United Kingdom. Other crypto exchanges operating in the region may face increased scrutiny, potentially leading some platforms to seek more crypto-friendly regulatory jurisdictions.
Investors and market participants will closely watch how Coinbase addresses these compliance issues and whether the company can maintain its commitment to regulatory standards while improving its control systems to prevent future breaches.
As the cryptocurrency market continues to evolve, this incident reminds us of the growing importance of regulatory compliance in the digital asset space. Companies operating in this sector must remain vigilant and proactive in their approach to financial crime prevention and regulatory adherence.
