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Paxos Pays $48.5 Million to Settle New York AML Case Linked to Former Binance Partnership
NYDFS cites due diligence gaps and failures to monitor transactions involving illicit actors
Paxos has reached a $48.5 million settlement with the New York State Department of Financial Services (NYDFS) over anti-money laundering failures connected to its past relationship with Binance.
Under the terms of the settlement the blockchain infrastructure provider will pay a $26.5 million penalty to the state and invest $22 million to improve its compliance programme.
Paxos had an agreement with Binance to market and distribute the Binance USD (BUSD) stablecoin. According to the NYDFS, the company did not conduct sufficient due diligence on its former partner and had systemic shortcomings in its AML programme, including failures to effectively monitor for illicit activity and escalate red flags to senior management.
Review Finds Transactions Involving Illicit Actors
A regulatory review of Binance transactions between 2017 and 2022 across selected virtual currencies found that $1.6 billion in transactions flowed to or from the platform involving illicit actors. The NYDFS also found that Binance processed transactions to and from entities after they were sanctioned by the U.S. Office of Foreign Assets Control.
NYDFS Superintendent Adriene Harris stated that regulated entities must maintain appropriate risk management frameworks that match their business risks, including the oversight of business partners and third-party vendors.
Related U.S. Enforcement Actions Against Binance
The NYDFS findings on sanctions breaches came amid broader U.S. enforcement actions against Binance. In November 2023, the exchange agreed to pay a $4.3 billion fine under a proposed plea deal to settle allegations of money laundering, bank fraud, and sanctions violations.
The following April, founder Changpeng Zhao was sentenced to four months in prison after pleading guilty to violating U.S. anti-money laundering laws and resigning from his role at the company.
Part of a Longer Regulatory Timeline
This settlement follows earlier action by the NYDFS in February 2023, when the regulator ordered Paxos to stop issuing new BUSD tokens. At that time, the agency cited unresolved issues related to Paxos’ oversight of its relationship with Binance.
In the same period, Paxos disclosed that the U.S. Securities and Exchange Commission had notified the company it was considering recommending an action alleging that BUSD was a security and should have been registered under federal securities laws. Paxos said it disagreed with the SEC’s position, maintaining that the stablecoin was fully backed 1:1 with U.S. dollar-denominated reserves held in segregated, bankruptcy-remote accounts.
The February 2023 order ended the issuance of new BUSD tokens.
Regulatory Emphasis on Compliance
The NYDFS settlement underscores the importance placed by regulators on compliance standards for digital asset firms, particularly when partnering with other major platforms. The agency’s findings highlight the risks of insufficient due diligence and monitoring in high-volume cryptocurrency operations.
