NYDFS Fines Paxos $26.5M, Orders Compliance Overhaul in Binance Stablecoin Case

The New York Department of Financial Services announced a $48.5 million settlement with Paxos, a crypto infrastructure company. The settlement concerns Paxos' partnership with Binance and alleged shortcomings in its anti-money laundering controls.

In February 2023, Paxos ceased minting Binance USD tokens following an NYDFS investigation into its relationship with Binance and AML weaknesses. Binance then gradually discontinued BUSD support across its platforms.

The settlement includes a $26.5 million fine and a $22 million commitment from Paxos to enhance its compliance program.

NYDFS Highlights Due Diligence Failures

According to NYDFS, Paxos failed to perform regular due diligence on Binance. The regulator stated that approximately $1.6 billion in illicit funds passed through Binance via the BUSD stablecoin. As a result, in February 2023, NYDFS ordered Paxos to stop distributing BUSD.

A Paxos spokesperson said the settlement addresses “historical compliance matters including the prior partnership with Binance,” and added that the issues were “identified over two and half years ago and have since been fully remediated.” It is also stated there was no impact on customer accounts and no consumer harm. It also noted that BUSD was successfully wound down in 2023 without losing its dollar peg.

Stablecoin Provider Paxos to Pay $26.5M Fine to Settle Charges Related to Binance► https://t.co/O8NXol2Yiz https://t.co/O8NXol2Yiz

Regulatory Expectations on Risk Management

Adrienne A. Harris, superintendent of NYDFS, emphasized that regulated firms must have risk management systems suited to their business risks, including those related to partners and vendors.

AML and Know Your Customer rules remain central regulatory concerns in the crypto sector. Several companies are awaiting clearer regulatory guidance on these requirements.

You may find it interesting at FinanceMagnates.com: Paxos Ups Its Stablecoin Bet: Launches MAS-Compliant USDG.

SEC Issues Wells Notice to Paxos

Earlier, the U.S. Securities and Exchange Commission issued Paxos a Wells Notice. The SEC warned of possible legal action over the BUSD stablecoin, accusing Paxos of distributing unregistered securities and breaching consumer protection laws through its partnership with Binance.

NYDFS issued a similar warning one day later. It pointed to insufficient KYC controls as a key issue and mandated Paxos to conduct due diligence on all new customers.

The regulator also noted that while Paxos was authorized to issue BUSD on the Ethereum blockchain, it had not authorized issuance of Binance-Peg BUSD on any blockchain.