Drive-by regulating usually happens on roads where set rules don’t really exist, explaining the steady drumbeat of enforcement action levied against crypto firms. But that style of regulation has now hit New York, where crypto rules are deemed so onerous by the industry that they prompted mass exodus.
What’s happening: The New York State Department of Financial Services on Tuesday imposed a $30 million fine on the crypto trading division of Robinhood Markets, citing alleged violations of anti-money-laundering and cybersecurity regulations, among other things.
- Turns out its compliance program was understaffed and led by an officer who lacked the experience to do so.
- Meanwhile, Robinhood CEO Vlad Tenev on Tuesday said the firm would be reducing headcount by almost 25% as ambitious growth plans during the bull run led to overhiring.
Why it matters: For how tough New York is supposed to be for crypto firms to open shop, Robinhood Crypto has apparently operated for years without being compliant.
The details: The enforcement action — a first against a crypto shop for the state’s financial services regulator — follows approval of Robinhood Crypto to operate by granting it the BitLicense in January 2019.
- Robinhood mentions the investigation in its go-public documents filed with the Securities and Exchange Commission in March 2019, saying they would likely pay a $10 million fine (a third of the actual settlement).
What they’re saying: Robinhood Crypto, or “RHC,” was “not fully compliant” with state regulations when they started operating under its license on May 23 2019, the consent order reads.
- Deficiencies compounded deficiencies. “Weaknesses in RHC’s approach to compliance led to issues across RHC’s BSA/AML and Transaction Monitoring programs.”
- Its compliance dept. was understaffed. “RHC did not have sufficient BSA/AML staff with the appropriate level of skills to support its BSA/AML compliance program.”
- And led by the unskilled. “RHC’s [chief compliance officer], who lacked commensurate experience to oversee a compliance program such as RHC’s, particularly as it grew, was insufficiently involved in the oversight of the launch and implementation of RHC’s automated software program.”
- Robinhood had a lot of past-due homework. “RHM had a substantial backlog in processing alerts, i.e., in evaluating potentially suspicious transactions.”
- And they were doing checks, by hand. “RHC did not timely transition its manual system to an automated transaction monitoring system, which was unacceptable for a program that, as of September 30, 2019, averaged 106,000 transactions daily, totaling $5.3 million.”
- Also, Robinhood was late to heed. Robinhood hired an outside consultant in December 2019, who described the firm’s manual processing system as having “minimal value currently,” but the firm didn’t put in software until April 2021.
Meanwhile, Robinhood kept certifying its compliance.
- “Notwithstanding all of these deficiencies, including acknowledgment by RHF’s Head of AML that RHC was not in compliance with the Transaction Monitoring Regulation, on May 31, 2020, RHC’s CCO filed a Certification of Compliance with DFS,” the consent order says.
Be smart: Starting a crypto firm in New York is hard, in part due to the BitLicense. And this year got more expensive for licensees to operate in the state.
- Just over 30 digital assets businesses have been approved to operate in New York.
- Case in point: Coinbase Global’s coins directory, which shows where in the world trading is allowed for each specific asset, breaks New York out as its own crypto jurisdiction, separate from the U.S. (See ex. bitcoin here)
- Of note: New York’s 2023 fiscal budget included a provision requiring licensed firms to pay for the cost of making sure they’re in compliance.