Paxos Finally Reaches $48.5M Settlement with NYDFS Over Binance-Linked Stablecoin

Paxos Trust has agreed to a $48.5 million settlement with the New York Department of Financial Services (NYDFS). This agreement addresses charges of inadequate due diligence on its former partner, Binance. It also focuses on systemic deficiencies in its anti-money laundering (AML) program. 

Paxos Settle AML Failures Linked to Binance Operations

The settlement breaks down into a $26.5 million civil fine and $22 million earmarked for compliance improvements. NYDFS Superintendent Adrienne A. Harris emphasized that it reflects the department’s commitment to safeguarding the financial system from illicit activity.

“Regulated entities must maintain appropriate risk management frameworks that correspond to their business risks, which include relationships with business partners and third-party vendors. The Department continues taking significant steps to ensure accountability, in turn protecting consumers and safeguarding the integrity of the financial system,” Harris said. 

In response, Paxos expressed its satisfaction with resolving the matter. The firm also emphasized that it has “fully remediated” the compliance issues. It further affirmed that customer accounts were unaffected and no consumer was harmed. 

Background on Paxos and Binance

Paxos previously partnered with the leading crypto exchange Binance in 2019 to market and distribute the Binance USD stablecoin. Like most stablecoins, BUSD was pegged 1:1 to the U.S. dollar. 

However, the regulatory scrutiny began in 2023 when NYDFS ordered Paxos to stop issuing BUSD, the Binance USD stablecoin. The order followed the uncovering of oversight shortcomings in Paxos’s relationship with Binance.

According to the authorities, Paxos onboarded customers with limited KYC controls and failed to escalate red flags. This led to a lack of protocols to identify trade-based AML risks, creating vulnerabilities that could be exploited by criminal actors.

A post-review identified that between July 2017 and November 2022, approximately $1.6 billion in transactions on Binance involved illicit actors. The transactions included Ponzi schemes, darknet activity, and entities sanctioned by the U.S. Office of Foreign Assets Control (OFAC).

In November 2023, Binance pleaded guilty and agreed to a $4.32 billion criminal penalty for federal AML and sanctions violations. Then, the United States Securities and Exchange Commission (SEC) dismissed its civil case against the exchange earlier this year. This reflected a change in its regulatory approach.

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