Paxos Faces $48.5M Penalty from NYDFS Over Compliance Issues in Binance Partnership

By: Eliza Bennet

The New York Department of Financial Services (NYDFS) has announced a significant enforcement action against the stablecoin issuer Paxos, imposing a fine totaling $48.5 million due to compliance lapses associated with its partnership with Binance. According to the NYDFS, the fine includes a $26.5 million civil monetary penalty and an additional mandate for Paxos to invest $22 million over three years to enhance its compliance systems.

This action stems from an extensive investigation into the company's deficiencies in anti-money laundering (AML) measures and customer due diligence processes. The central focus of this investigation was Paxos's association with Binance, a leading cryptocurrency exchange, and their joint issuance of the Binance USD (BUSD) stablecoin. NYDFS identified a failure on Paxos's part to perform comprehensive due diligence on Binance, which was a breach of the terms outlined in a 2020 agreement with the financial regulator.

The regulatory scrutiny intensified after a review of Binance-related transactions from 2017 to 2022 uncovered that $1.6 billion in transactions were linked to illicit actors or entities sanctioned by the US Office of Foreign Assets Control (OFAC). Consequently, the NYDFS ordered Paxos in February 2023 to cease the issuance of BUSD, leading to the gradual phase-out of the stablecoin from the market, effectively terminating Paxos's partnership with Binance.

Beyond the Binance connection, the NYDFS highlighted broader compliance issues within Paxos, such as inadequate Know-Your-Customer (KYC) protocols, delayed responses to law enforcement, and outdated transaction monitoring systems that failed to recognize suspicious activity. The regulatory body pointed out that Paxos lacked sound internal procedures to initiate investigations, hindering their capacity to tackle high-risk behaviors swiftly. This enforcement action is consistent with New York's stringent regulatory approach towards the cryptocurrency sector, as evidenced by similar actions against other firms like Robinhood and Block Inc., underlining the State's commitment to safeguarding financial markets and consumer interests. For more insights into these regulatory actions, you can visit reputable sources in the crypto sector such as exchanges or financial regulatory body websites.