The Washington State Department of Financial Institutions (DFI) taking action against Coinme shows how startups can sometimes stumble into complex regulatory challenges. For entrepreneurs watching this unfold, there’s a lot to unpack about accountability, compliance, and communication.
The issue revolves around unredeemed cryptocurrency vouchers, amounting to over $8 million, which Coinme treated as company revenue until customers redeemed them. The state alleges this practice violated money transmission laws and failed to meet unclaimed property regulations. Think of it similar to unclaimed gift cards; businesses can't just pocket that money, as those funds technically still belong to the customers. This misunderstanding, or deliberate decision, as the DFI implies, has led to a temporary cease-and-desist order, fines, and potential license revocation for the company.
In building startups, it's easy to focus on growth at the expense of details like regional compliance and financial controls. But let Coinme serve as a cautionary tale. Here’s a breakdown of what entrepreneurs need to learn:
Lessons From Coinme's Regulatory Misstep
1. Customer Funds Are Not Revenue
Customer money such as deposits, vouchers, or prepayments typically belongs in trust accounts until claimed or used. Moving it to your income statement might make cash flow look prettier, but it can land you in hot water. The DFI isn't just asking for a refund; they’re also proposing hefty fines and even trying to ban Coinme's CEO from the industry for 10 years.
2. Frameworks Differ by Region
If you operate in multiple states or countries, it’s your job to understand each jurisdiction's financial regulations. This applies even for blockchain-based startups that often assume they're exempt from traditional governance laws. Coinme’s accusations include failing to report unclaimed funds to Washington State, a fearsome offense in compliance terms.
3. Disclosing Terms Clearly Is Non-Negotiable
If customers don't understand the terms and conditions of your services, you could be seen as misleading them. One of the complaints was that Coinme didn’t clearly communicate its policy on voucher redemptions. Without transparency, you invite consumer distrust and regulatory scrutiny.
4. Follow Communication Best Practices
The inclusion of an outdated customer service phone number on critical documents shows lapses in operational diligence. This undermines the user experience and raises questions about your internal processes. Regular audits can prevent these oversights.
5. You’re Always Under Scrutiny
Scaling businesses don’t operate under the radar. Once you build something sizable, Coinme claims it’s running the world’s largest crypto cash network, government agencies and watchdogs will start paying closer attention. Being proactive about compliance before regulators knock on your door is cheaper and less disruptive in the long run.
A Founder's To-Do List to Avoid Trouble
A. Financial Accountability
Hire talent with expertise in financial regulations, or outsource to firms that specialize in this field. If you deal with customer funds, make sure every penny is accounted for and categorized correctly. Implement systems that separate account types like operational capital and consumer assets.
B. Regular Compliance Checks
Don’t wait to get reported to regulators. Schedule annual compliance health checks with legal and financial advisors. Additionally, track emerging regulations that might affect your business model.
C. Improve Transparency
Consumer-facing terms should be clear and updated frequently. Don’t just rely on legal jargon; break down policies in plain language that every customer can understand. This builds trust and reduces misunderstandings.
D. Invest in Operational Due Diligence
That expired phone number Coinme listed? It’s a sign of negligence. Things like outdated contact details can seem minor, but they hint at trouble elsewhere in the company. Conduct an internal audit of public-facing materials quarterly, including FAQs and support detail accuracy.
E. Anticipate Pivot Risks
Like Coinme, many startups tweak or discontinue products on their growth journey. If you sunset a service, such as Coinme's discontinued voucher system, be sure to manage refunds, obligations, and communications cleanly to avoid triggering disputes later.
Mistakes Entrepreneurs Should Avoid
-
Assuming Crypto Is “Different”
New sectors like blockchain aren’t exempt from traditional laws. Regulations will always catch up, and you should be prepared. -
Complicating Customer Terms
Overly technical or confusing processes leave users frustrated and expose you to complaints. Clear, straightforward redemption steps could have protected Coinme. -
Reactive Compliance
If you only address legal and operational flaws after someone complains, you’re too late. Proactive measures cost less and keep your reputation intact. -
Skipping Advisor Input
Expert guidance from lawyers, accountants, and compliance specialists might seem like a "nice to have," but it’s an essential investment as you scale.
Why This Matters to Startup Founders
What happened to Coinme underscores the importance of building infrastructure that protects consumers as well as your business. As a founder, the urge to grow can blind you to operational weaknesses that may cost you later. It’s not just about knowing the rules, but actively designing your processes around them. After all, you’re not just representing your business; you’re also influencing public perception of the entire industry you operate in.
For those interested in cryptocurrency ventures, I recommend staying informed through reputable channels like GeekWire’s business section or trusted regulators’ updates such as the Washington State Department of Financial Institutions. These resources will help you anticipate challenges and strengthen your compliance posture.
Coinme’s regulatory troubles don’t spell the end, but the road to recovery could be expensive and time-consuming. For startup leaders, learning from this incident could help prevent similar mistakes and inspire trust from both customers and regulators. My advice: make compliance one of your non-negotiable priorities. It’s not glamorous, but it’s how you avoid headlines for all the wrong reasons.
FAQ
1. What led to the Washington State Department of Financial Institutions taking action against Coinme?
The DFI alleged that Coinme improperly treated over $8 million in unredeemed customer vouchers as company revenue, violating money transmission laws and unclaimed property regulations. Explore the full details on GeekWire
2. What penalties did Coinme face due to the regulatory violations?
Coinme is required to refund $8 million in unredeemed vouchers, faces a $300,000 fine, and could have its money transmission license revoked. The DFI is also seeking to ban Coinme's CEO, Neil Bergquist, from the industry for 10 years. Learn more about the penalties from Phemex
3. How did Coinme justify its handling of the unredeemed vouchers?
Coinme claimed it accounted for unredeemed vouchers similarly to gift card liabilities and ensured customers could still redeem vouchers or request cash refunds. The company disputes the allegations as an accounting disagreement. Find more details at The Seattle Times
4. What are unclaimed property laws, and how did Coinme allegedly violate them?
Unclaimed property laws require businesses to turn over unclaimed customer funds to the state after a certain period. Coinme failed to report or submit unredeemed voucher funds to Washington's unclaimed property system. Read about Coinme’s legal challenges at Bitget
5. Was Coinme’s discontinued service linked to its violations?
Yes, the regulatory issues stem from Coinme's discontinued voucher system, which ended in August 2023. Regulators claim the company mismanaged unredeemed funds from this service. Discover more about this on Yahoo Finance
6. How did Coinme’s operational practices come under scrutiny?
The DFI accused Coinme of maintaining insufficient financial reserves, filing inaccurate reports, and listing an inactive customer service phone number on critical customer documents. Learn more about the operational criticisms on The Oregonian
7. How did Coinme respond to the state’s allegations?
Coinme disputed the allegations and has requested an administrative hearing. The company emphasized it informed customers about voucher redemption and replaced the system in 2023 with an instant credit system for purchases. Get more insights via GeekWire
8. What does this case signify for startup founders in compliance-heavy industries?
The Coinme case highlights the importance of prioritizing compliance, clear communication with customers, and proactive auditing of financial and operational systems. Non-compliance can lead to reputational damage and costly legal consequences.
9. What should founders do to stay compliant with state or regional laws?
Entrepreneurs should hire financial regulation experts, conduct regular compliance audits, ensure customer funds are properly categorized, and keep up with evolving industry regulations. Find compliance tips on GeekWire
10. How does the Coinme issue reflect broader challenges in the cryptocurrency industry?
The incident emphasizes that cryptocurrency firms are subject to traditional regulatory frameworks. Growing scrutiny from financial regulators indicates that the industry must align with legal consumer protections and operational standards. Explore regulatory challenges via BeInCrypto
About the Author
Violetta Bonenkamp, also known as MeanCEO, is an experienced startup founder with an impressive educational background including an MBA and four other higher education degrees. She has over 20 years of work experience across multiple countries, including 5 years as a solopreneur and serial entrepreneur. Throughout her startup experience she has applied for multiple startup grants at the EU level, in the Netherlands and Malta, and her startups received quite a few of those. She’s been living, studying and working in many countries around the globe and her extensive multicultural experience has influenced her immensely.
Violetta Bonenkamp's expertise in CAD sector, IP protection and blockchain
Violetta Bonenkamp is recognized as a multidisciplinary expert with significant achievements in the CAD sector, intellectual property (IP) protection, and blockchain technology.
CAD Sector:
- Violetta is the CEO and co-founder of CADChain, a deep tech startup focused on developing IP management software specifically for CAD (Computer-Aided Design) data. CADChain addresses the lack of industry standards for CAD data protection and sharing, using innovative technology to secure and manage design data.
- She has led the company since its inception in 2018, overseeing R&D, PR, and business development, and driving the creation of products for platforms such as Autodesk Inventor, Blender, and SolidWorks.
- Her leadership has been instrumental in scaling CADChain from a small team to a significant player in the deeptech space, with a diverse, international team.
IP Protection:
- Violetta has built deep expertise in intellectual property, combining academic training with practical startup experience. She has taken specialized courses in IP from institutions like WIPO and the EU IPO.
- She is known for sharing actionable strategies for startup IP protection, leveraging both legal and technological approaches, and has published guides and content on this topic for the entrepreneurial community.
- Her work at CADChain directly addresses the need for robust IP protection in the engineering and design industries, integrating cybersecurity and compliance measures to safeguard digital assets.
Blockchain:
- Violetta’s entry into the blockchain sector began with the founding of CADChain, which uses blockchain as a core technology for securing and managing CAD data.
- She holds several certifications in blockchain and has participated in major hackathons and policy forums, such as the OECD Global Blockchain Policy Forum.
- Her expertise extends to applying blockchain for IP management, ensuring data integrity, traceability, and secure sharing in the CAD industry.
Violetta is a true multiple specialist who has built expertise in Linguistics, Education, Business Management, Blockchain, Entrepreneurship, Intellectual Property, Game Design, AI, SEO, Digital Marketing, cyber security and zero code automations. Her extensive educational journey includes a Master of Arts in Linguistics and Education, an Advanced Master in Linguistics from Belgium (2006-2007), an MBA from Blekinge Institute of Technology in Sweden (2006-2008), and an Erasmus Mundus joint program European Master of Higher Education from universities in Norway, Finland, and Portugal (2009).
She is the founder of Fe/male Switch, a startup game that encourages women to enter STEM fields, and also leads CADChain, and multiple other projects like the Directory of 1,000 Startup Cities with a proprietary MeanCEO Index that ranks cities for female entrepreneurs. Violetta created the "gamepreneurship" methodology, which forms the scientific basis of her startup game. She also builds a lot of SEO tools for startups. Her achievements include being named one of the top 100 women in Europe by EU Startups in 2022 and being nominated for Impact Person of the year at the Dutch Blockchain Week. She is an author with Sifted and a speaker at different Universities. Recently she published a book on Startup Idea Validation the right way: from zero to first customers and beyond, launched a Directory of 1,500+ websites for startups to list themselves in order to gain traction and build backlinks and is building MELA AI to help local restaurants in Malta get more visibility online.
For the past several years Violetta has been living between the Netherlands and Malta, while also regularly traveling to different destinations around the globe, usually due to her entrepreneurial activities. This has led her to start writing about different locations and amenities from the POV of an entrepreneur. Here’s her recent article about the best hotels in Italy to work from.
About the Publication
Fe/male Switch is an innovative startup platform designed to empower women entrepreneurs through an immersive, game-like experience. Founded in 2020 during the pandemic "without any funding and without any code," this non-profit initiative has evolved into a comprehensive educational tool for aspiring female entrepreneurs.The platform was co-founded by Violetta Shishkina-Bonenkamp, who serves as CEO and one of the lead authors of the Startup News branch.
Mission and Purpose
Fe/male Switch Foundation was created to address the gender gap in the tech and entrepreneurship space. The platform aims to skill-up future female tech leaders and empower them to create resilient and innovative tech startups through what they call "gamepreneurship". By putting players in a virtual startup village where they must survive and thrive, the startup game allows women to test their entrepreneurial abilities without financial risk.
Key Features
The platform offers a unique blend of news, resources,learning, networking, and practical application within a supportive, female-focused environment:
- Skill Lab: Micro-modules covering essential startup skills
- Virtual Startup Building: Create or join startups and tackle real-world challenges
- AI Co-founder (PlayPal): Guides users through the startup process
- SANDBOX: A testing environment for idea validation before launch
- Wellness Integration: Virtual activities to balance work and self-care
- Marketplace: Buy or sell expert sessions and tutorials
Impact and Growth
Since its inception, Fe/male Switch has shown impressive growth:
- 5,000+ female entrepreneurs in the community
- 100+ startup tools built
- 5,000+ pieces of articles and news written
- 1,000 unique business ideas for women created
Partnerships
Fe/male Switch has formed strategic partnerships to enhance its offerings. In January 2022, it teamed up with global website builder Tilda to provide free access to website building tools and mentorship services for Fe/male Switch participants.
Recognition
Fe/male Switch has received media attention for its innovative approach to closing the gender gap in tech entrepreneurship. The platform has been featured in various publications highlighting its unique "play to learn and earn" model.