New York Fines Paxos $48.5M for Binance Compliance Failures

The New York Department of Financial Services (NYDFS) has announced a $48.5 million enforcement action against Paxos, a stablecoin issuer, over compliance failures related to its partnership with Binance, the largest cryptocurrency exchange by trading volume. The settlement includes a $26.5 million civil fine and a three-year requirement for Paxos to invest an additional $22 million to enhance its compliance infrastructure [1].

The action follows an extensive investigation into Paxos' anti-money laundering (AML) and customer due diligence protocols. The regulator found that Paxos failed to conduct adequate due diligence on Binance, violating the terms of a prior agreement with the NYDFS in 2020. The investigation revealed that between 2017 and 2022, $1.6 billion in transactions linked to illicit actors or entities sanctioned by the U.S. Office of Foreign Assets Control (OFAC) were processed through Paxos’ systems. As a result, the NYDFS ordered Paxos to cease issuing Binance USD (BUSD) in February 2023, effectively ending the partnership and leading to the gradual removal of BUSD from the market [1].

Beyond the Binance-related issues, the NYDFS identified systemic weaknesses in Paxos’ compliance program. These included weak Know-Your-Customer (KYC) protocols, slow responses to law enforcement inquiries, and outdated transaction monitoring systems that failed to detect suspicious activity and money laundering patterns. The regulator also highlighted the absence of internal policies to determine when to initiate investigations after receiving law enforcement requests, which hindered the company’s ability to act promptly against high-risk activity [1].

This enforcement action aligns with a broader regulatory trend in New York, where the NYDFS has increasingly focused on ensuring compliance within the cryptocurrency industry. The department has previously taken action against firms such as Robinhood, Block Inc. (Cash App), and Genesis. NYDFS Superintendent Adrienne Harris reiterated the agency’s commitment to protecting consumers and markets through rigorous examinations, supervision, and enforcement where necessary [1].

The case underscores the growing regulatory scrutiny of crypto firms operating in New York and reflects the increasing emphasis on AML and KYC compliance in the digital asset space. It also highlights the challenges faced by stablecoin issuers in maintaining robust compliance frameworks when partnering with major crypto exchanges. The outcome of this enforcement action is likely to influence how similar entities approach regulatory requirements, particularly in relation to third-party risk management and transaction monitoring.

Source:

[1] New York fines Paxos $48.5M over Binance-linked compliance lapses

https://cryptoslate.com/new-york-fines-paxos-48-5m-over-binance-linked-compliance-lapses/