tl;dr
The New York Department of Financial Services (NYDFS) fined Paxos $48.5 million for compliance failures, including a $26.5 million civil penalty and requiring a $22 million investment to improve compliance over three years. The investigation found significant lapses in anti-money laundering and cust...
The New York Department of Financial Services (NYDFS) has imposed a $48.5 million penalty on Paxos following an enforcement action related to the stablecoin issuer's compliance failures. This penalty consists of a $26.5 million civil monetary fine and requires Paxos to invest an additional $22 million over three years to enhance its compliance systems. The financial regulator's investigation revealed significant lapses in Paxos’ anti-money laundering (AML) and customer due diligence procedures.
The core focus of the enforcement was Paxos’ relationship with Binance, the largest cryptocurrency exchange by trading volume. Paxos issued the Binance USD (BUSD) stablecoin in partnership with Binance but failed to conduct proper due diligence on the exchange. This oversight violated a 2020 agreement with the NYDFS. A transaction review spanning from 2017 to 2022 uncovered that $1.6 billion in Binance transactions were associated with illicit actors or entities under US sanctions by the Office of Foreign Assets Control (OFAC). Consequently, the NYDFS ordered Paxos to cease issuing BUSD in February 2023, effectively ending its partnership with Binance and prompting the gradual market withdrawal of BUSD.
Beyond the Binance-related issues, the NYDFS identified broader systemic weaknesses within Paxos’s compliance framework. These included insufficient Know-Your-Customer (KYC) measures, sluggish responses to law enforcement inquiries, and outdated manual transaction monitoring systems. These flawed systems failed to detect coordinated suspicious activities and clear money laundering patterns. Additionally, Paxos lacked internal policies for initiating investigations upon receiving law enforcement requests, hampering timely identification and response to high-risk behavior.
This enforcement action reflects a larger regulatory trend in New York, where the NYDFS has increasingly focused on cryptocurrency firms. Past actions have targeted companies such as Robinhood, Block Inc. (operator of Cash App), and the bankrupt crypto lender Genesis. Superintendent Adrienne Harris emphasized the NYDFS’s leadership role in virtual currency regulation and its dedication to protecting both consumers and financial markets through rigorous examinations, supervision, and enforcement where necessary.