New York’s top financial regulator has fined Paxos, a New York City-based stablecoin issuer, $26.5 million for “systemic failures” in its compliance and anti-money laundering programs, including a past partnership with global crypto exchange Binance, according to a Thursday announcement.
In addition to the fine, Paxos agreed to spend another $22 million improving its compliance program to bring it up to snuff with the New York Department of Financial Services’ (NYDFS) standards.
“The Department of Financial Services has led the nation in regulating the virtual currency industry, protecting consumers and markets through examinations, supervision, and where necessary, enforcement,” NYDFS Superintendent Adrienne Harris said in a press statement. “Regulated entities must maintain appropriate risk management frameworks that correspond to their business risks, which includes 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.”
The compliance failures identified by NYDFS were largely tied to Paxos’ one-time partnership with Binance, the world’s largest crypto exchange. The two companies teamed up in 2019 to issue Binance’s dollar-pegged stablecoin, BUSD. The relationship with Binance eventually landed Paxos in hot water: in 2023, NYDFS launched an investigation into Paxos’s issuance of BUSD, the U.S. Securities and Exchange Commission (SEC) sent Paxos a Wells notice informing the company of its intention to sue (a year later, the SEC decided to drop its enforcement action) and Paxos ultimately decided to stop issuing BUSD altogether at the order of NYDFS.
The fine announced Thursday is tied to NYDFS’ original investigation. According to NYDFS’ press release, the investigation revealed that Paxos didn’t have appropriate controls in place to effectively monitor for illicit activity occurring through Binance. And when illicit activity was identified, the regulator said, the company “failed to escalate red flags” to Paxos’ higher-ups and board members.
In addition to the Binance-related compliance issues, NYDFS said its investigation into Paxos turned up other deficiencies in its compliance program, including an “unsophisticated” Know Your Customer (KYC) program that allowed illicit actors to open multiple accounts and remain undetected, and a “deficient” transaction monitoring system that prevented Paxos from “detecting obvious patterns of money laundering.”
A representative for Paxos described the compliance failures identified by NYDFS as “historical issues that were identified over two and a half years ago and have since been fully remediated.” The issues, the representative added, “had no impact on customer accounts and there was no consumer harm.”
“This marks the resolution of this matter and we are pleased to put it behind us,” the representative said. “There are no new claims regarding Paxos’ relationship with Binance or the issuance of BUSD, and Paxos’ other white-labeled stablecoins operate on similar models with different partners and have not faced any regulatory issues.”
