The New York Department of Financial Services (NYDFS) has imposed a $48.5 million penalty on Paxos as part of its enforcement action against the stablecoin issuer, according to an Aug. 7 announcement.
The settlement includes a $26.5 million civil monetary fine and mandates Paxos to spend an additional $22 million over three years to strengthen its compliance systems.
According to the financial regulator, this development follows a wide-ranging investigation into Paxos’ compliance failures related to anti-money laundering (AML) and customer due diligence procedures.
Paxos’ relationship with Binance attracts scrutiny
The enforcement action centered on Paxos’ relationship with Binance, the largest crypto exchange by trading volume.
According to the financial regulator, Paxos began issuing the Binance USD (BUSD) stablecoin in collaboration with the exchange.
However, it failed to perform adequate due diligence on the trading platform, violating the terms of a 2020 agreement with the NYDFS.
This lack of oversight came to light during a review of Binance transactions conducted between 2017 and 2022. The review found that $1.6 billion worth of transactions were linked to illicit actors or entities sanctioned by the US Office of Foreign Assets Control (OFAC).
As a result, the NYDFS ordered Paxos to halt the issuance of BUSD in February 2023. This directive effectively ended Paxos’ partnership with Binance and led to the gradual phase-out of BUSD from the market.
Apart from the Binance issues, the NYDFS also highlighted broader systemic issues within Paxos’s compliance program.
These include weak Know-Your-Customer (KYC) protocols and delayed responses to law enforcement inquiries. Additionally, outdated, manual transaction monitoring systems failed to detect coordinated suspicious activity and clear money laundering patterns.
The investigation further noted that Paxos lacked internal policies to determine when to initiate investigations after receiving a law enforcement request. This oversight limited the firm’s ability to identify and respond to high-risk behavior in a timely manner.
New York’s crypto enforcement trend
The action is part of a broader trend in New York’s regulatory approach to the crypto industry.
Over the years, the NYDFS has taken enforcement actions against firms including Robinhood, Block Inc. (operator of Cash App), and the now-bankrupt Genesis.
Commenting on these enforcement actions, Superintendent Adrienne Harris reaffirmed the agency’s commitment to safeguarding financial markets and consumers.
She said:
“The Department of Financial Services has led the nation in regulating the virtual currency industry, protecting consumers and markets through examinations, supervision, and where necessary, enforcement.”
