Paxos – Earlybirds Invest

Paxos has agreed to pay $48.5 million to settle with New York’s financial regulator over issues linked to its partnership with Binance

$12.57B

and weaknesses in how it handled anti-money laundering checks.

The New York Department of Financial Services (NYDFS) announced the deal on August 7.

As part of the agreement, Paxos will pay a $26.5 million fine and spend another $22 million to improve its internal compliance systems.

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The regulator found that Paxos failed to properly review its relationship with Binance and allowed around $1.6 billion to move through its Binance USD (BUSD) stablecoin in suspicious transactions.

NYDFS Superintendent Adrienne A. Harris stated:

Regulated entities must maintain appropriate risk management frameworks that correspond to their business risks, which include relationships with business partners and third-party vendors.

In February 2023, NYDFS ordered Paxos to stop issuing BUSD. The US Securities and Exchange Commission (SEC) also sent a Wells Notice to Paxos.

The letter claimed that the company had broken securities laws by offering an unregistered asset through its partnership with Binance. However, the SEC dropped the notice in 2024 and did not follow through with charges.

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Still, NYDFS claimed that Paxos failed to meet know your customer (KYC) requirements, which are meant to ensure that businesses understand who they are dealing with.

Recently, the SEC reached a settlement with Huynh Tran Quang Duy, the founder of MyConstant. What does the agreement include? Read the full story.

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.”

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