TLDR
- NYDFS fined Paxos $26.5 million for compliance failures related to its Binance partnership and BUSD stablecoin
- Paxos must spend an additional $22 million to improve its compliance program to meet regulatory standards
- The regulator found $1.6 billion in illicit flows through BUSD and inadequate monitoring systems
- Compliance issues included deficient Know Your Customer programs and poor transaction monitoring
- Paxos stopped issuing BUSD in 2023 after regulatory pressure and calls the issues “historical” and “fully remediated”
The New York Department of Financial Services has ordered stablecoin issuer Paxos to pay $48.5 million to resolve compliance violations tied to its partnership with crypto exchange Binance. The settlement includes a $26.5 million fine and requires Paxos to invest $22 million in upgrading its compliance systems.
NYDFS announced the enforcement action Thursday, citing “systemic failures” in Paxos’ anti-money laundering and compliance programs. The violations stem from Paxos’ role in issuing Binance USD (BUSD), a dollar-pegged stablecoin launched through a 2019 partnership with the world’s largest crypto exchange.
The regulator found that Paxos failed to conduct proper due diligence on Binance as a business partner. NYDFS identified approximately $1.6 billion in illicit flows moving through BUSD between Binance and other platforms.
Investigators discovered that Paxos lacked appropriate controls to monitor suspicious activity occurring through its Binance partnership. When red flags were identified, the company failed to escalate concerns to senior management and board members as required.
The compliance problems extended beyond the Binance relationship. NYDFS found that Paxos operated an “unsophisticated” Know Your Customer program that allowed bad actors to open multiple accounts undetected.
Inadequate Transaction Monitoring Systems
The regulator also criticized Paxos’ transaction monitoring capabilities as “deficient.” These systems were unable to detect obvious patterns of money laundering, according to the NYDFS investigation.
NYDFS Superintendent Adrienne Harris emphasized the importance of proper risk management frameworks. She stated that regulated entities must maintain controls that match their business risks, including relationships with partners and vendors.
The Binance partnership began unraveling in early 2023. NYDFS launched its investigation into BUSD issuance and ordered Paxos to stop distributing the stablecoin in February 2023.
The Securities and Exchange Commission also sent Paxos a Wells notice in February 2023, warning of potential legal action over BUSD. The SEC accused Paxos of distributing unregistered securities through the Binance partnership.
However, the SEC withdrew its Wells notice in 2024, deciding not to pursue enforcement action against Paxos. The company voluntarily ceased BUSD issuance following the regulatory pressure.
Company Response to Settlement
Paxos representatives described the compliance failures as “historical issues” identified more than two years ago. The company states these problems have been “fully remediated” and caused no customer harm or impact on user accounts.
The settlement resolves the matter without new claims regarding Paxos’ Binance relationship or BUSD issuance. Paxos operates other white-labeled stablecoins with different partners that have not faced regulatory issues.
NYDFS authorized Paxos to issue BUSD on the Ethereum blockchain but never approved “Binance-Peg BUSD” for other networks. This distinction became part of the regulatory scrutiny surrounding the partnership.
The $22 million compliance investment must bring Paxos’ systems up to NYDFS standards. This includes improvements to anti-money laundering monitoring, Know Your Customer procedures, and transaction oversight capabilities.
Paxos expressed satisfaction with resolving the matter and putting it behind the company. The settlement allows Paxos to continue its other stablecoin operations without ongoing regulatory uncertainty from this case.
