Paxos Pledges $48.5 Million to NYDFS in AML Settlement Over Binance Ties

Paxos, a New York-licensed stablecoin issuer, has agreed to pay $48.5 million to the New York Department of Financial Services (NYDFS) to settle allegations involving inadequate due diligence on its former partner, Binance, and deficiencies in its anti-money laundering (AML) program [1]. The settlement includes a $26.5 million fine and a $22 million investment in compliance enhancements. The regulatory action stems from a multi-year investigation into Paxos’ AML controls, which failed to meet legal and regulatory expectations, particularly in monitoring transactions involving Binance and other counterparties [2].

According to an NYDFS press release, the probe revealed that Paxos did not maintain sufficient oversight of Binance, despite being a key partner in the issuance of the Binance USD (BUSD) stablecoin. The regulator identified critical shortcomings, including the absence of proper controls to monitor for illegal activity on the exchange. Additionally, Paxos failed to escalate warning signs to its senior leadership and board. One of the key issues was Binance’s “lax geofencing,” which allowed U.S. users to access its unlicensed platform [1].

The investigation found that between 2017 and 2022, approximately $1.6 billion in digital assets processed through Binance was linked to criminal activity. The platform had also processed transactions involving entities sanctioned by the U.S. Office of Foreign Assets Control (OFAC). These findings underscore the importance of rigorous due diligence and monitoring in partnerships between crypto firms and exchanges [2].

Beyond its relationship with Binance, Paxos was also criticized for running a weak AML program. The company’s Know Your Customer (KYC) procedures were deemed unsophisticated, allowing users to open multiple accounts with overlapping documentation and suspicious activity. Its transaction monitoring systems failed to detect clear signs of money laundering, and there were no clear protocols for responding to law enforcement requests, further delaying the identification of illicit activity [1].

Paxos, which has since rebranded as a compliance-focused blockchain infrastructure provider, maintains that the issues identified were historical and have been fully resolved. The company continues to operate other regulated stablecoins, including Pax Dollar (USDP) and PayPal USD (PYUSD). It has stated that the settlement did not impact customer accounts and that the firm remains committed to regulatory compliance [2].

The settlement highlights the growing regulatory scrutiny of the crypto sector, particularly in New York. As digital asset markets expand, the expectation for robust compliance frameworks is increasing. This case reinforces the principle that partners of non-compliant entities can face regulatory consequences, even if they are not directly involved in illicit activity. The NYDFS’ decision to allocate part of the penalty toward compliance improvements reflects a regulatory approach that seeks long-term industry reform, not just punitive measures [1].

The enforcement action also aligns with a broader trend of regulatory agencies holding multiple parties accountable in the crypto ecosystem. With high-profile investigations into exchanges like Binance, the message is clear: firms must proactively ensure that their business relationships do not expose them to compliance risks. As the regulatory landscape continues to evolve, the pressure on crypto firms to build and maintain strong AML frameworks will only increase [2].

Source: [1] https://finance.yahoo.com/news/paxos-reaches-48m-settlement-nydfs-192258396.html

[2] https://blockchair.com/news/paxos-pay-26-5-million-fine-charges-binance--00f48f6a4e77fb67