Financial regulatory body, NYDFS, imposes a penalty of $48.5 million on Paxos for falling short in compliance during its association with Binance, a cryptocurrency exchange.
Paxos, a New York-based stablecoin issuer, has reached a settlement with the New York Department of Financial Services (NYDFS) over compliance failures related to its partnership with Binance. The settlement, worth $48.5 million, marks the resolution of a long-standing investigation that began over two years ago.
The compliance issues between Paxos and Binance centred on Paxos's failures in anti-money laundering (AML) and due diligence related to its partnership distributing Binance USD (BUSD). Specifically, Paxos did not conduct proper due diligence on Binance, including inadequate monitoring of Binance’s lax geofencing controls that allowed U.S. users to access an unregulated crypto exchange.
Transaction monitoring systems at Paxos failed to identify illicit activity—including transactions totaling $1.6 billion flowing to or from fraudsters and sanctioned entities on Binance’s platform from 2017 to 2022. Paxos also had deficient Know Your Customer (KYC) protocols, onboarding customers without sufficient verification of identities, business legitimacy, or source of funds, and lacked formal investigation guidelines to handle law enforcement requests properly.
Under the terms of the settlement, Paxos must pay a $26.5 million fine to New York state and invest an additional $22 million to overhaul and strengthen its compliance program to meet NYDFS standards. This investment will focus on improving AML controls and risk management frameworks.
In a statement, Paxos emphasized that the compliance failures identified by NYDFS were "historical issues that were identified over two and a half years ago and have since been fully remediated." The company also stated that these issues had no impact on consumers or caused any harm.
NYDFS Superintendent Adrienne Harris emphasized the importance of risk management in a press statement, stating that regulated entities must maintain appropriate risk management frameworks that correspond to their business risks. Harris also noted that the settlement underscores the importance of rigorous AML controls and ongoing due diligence in regulated crypto partnerships.
The regulatory action against Paxos comes amid increasing regulatory oversight of the cryptocurrency industry, with anti-money laundering regulations and Know Your Customer (KYC) requirements becoming major focus areas for government agencies. The SEC dropped its enforcement action against Paxos in 2024.
This case serves as a reminder for all cryptocurrency companies to prioritize compliance and maintain robust AML programs to ensure the safety and security of their customers and the broader financial system.
- Despite Paxos's settlement with the NYDFS over compliance issues with Binance, the cryptocurrency industry is facing increased regulatory oversight, particularly in regards to anti-money laundering regulations and Know Your Customer requirements.
- In response to the settlement, Paxos is investing $22 million to strengthen its compliance program, focusing on improving anti-money laundering controls and risk management frameworks, like Ethereum and other cryptocurrency companies should do to prioritize compliance and maintain robust AML programs for the safety and security of their customers and the broader financial system.
