TLDR
- Paxos pays $26.5 million in fines to NY regulator for failure in due diligence.
New York regulator cited lapses in Paxos’ anti-money laundering efforts.
Paxos to spend $22 million on improving its compliance framework.
NYDFS had previously ordered Paxos to stop minting Binance BUSD in 2023.
Paxos Trust Company has reached a $48.5 million settlement with the New York Department of Financial Services (NYDFS) concerning its partnership with Binance on the Binance USD (BUSD) stablecoin. The settlement resolves issues related to Paxos’ failure to conduct sufficient due diligence in its partnership with the exchange, alongside shortcomings in its anti-money laundering program. This agreement follows an ongoing investigation into the firm’s activities over the last several years.
Paxos Settlement Details and Compliance Costs
As part of the settlement, Paxos will pay a $26.5 million fine to the state of New York. In addition to the fine, the company has agreed to invest $22 million to overhaul its compliance program. This move aims to rectify the issues that were found in relation to its BUSD partnership with Binance.
According to NYDFS Superintendent Adrienne Harris, regulated entities like the firm must maintain effective risk management practices, especially in regard to third-party relationships. The regulator also emphasized the importance of ensuring proper compliance frameworks to protect consumers and uphold the integrity of the financial system.
Paxos acknowledged the findings, clarifying that the compliance issues identified were historical and had been fully remediated over the past two and a half years. The firm also reassured that there was no harm caused to customer accounts as a result of these issues. A spokesperson for the firm stated that the problems were identified long ago and have already been addressed, marking the end of the matter from their perspective.
Binance Partnership and Lack of Due Diligence
The NYDFS’s findings primarily focused on Paxos’ partnership with Binance, which began in 2018 with the launch of BUSD. As the issuer and custodian of the stablecoin, Paxos failed to conduct adequate due diligence on Binance, particularly concerning the exchange’s operations and compliance measures.
The regulator noted that while Paxos requested assurances from Binance regarding the geofencing of U.S. customers and compliance controls, it did not perform an independent review of Binance’s claims. This oversight led to Paxos’ involvement in facilitating illicit financial flows via BUSD, estimated at $1.6 billion.
The NYDFS’s settlement also highlights the need for thorough risk assessment and ongoing monitoring of business relationships, especially those involving complex financial products like cryptocurrencies. This failure to perform independent checks, the regulator argues, posed significant risks to the stability of the financial system, prompting them to act decisively.
Legal and Regulatory Scrutiny of Paxos and Binance
The firm has faced scrutiny from multiple regulatory bodies regarding its role in the BUSD issuance. The U.S. Securities and Exchange Commission (SEC) had previously sent a Wells Notice to Paxos, alleging that BUSD constituted an unregistered security. However, the SEC later dropped the investigation in 2024. At the same time, NYDFS ordered Paxos to cease minting BUSD tokens in February 2023, a directive that was issued due to ongoing concerns about the relationship between Paxos and Binance.
In addition to regulatory scrutiny of Paxos, Binance has faced its own set of legal challenges. The exchange has been under investigation by the U.S. Department of Justice, which found that Binance had violated multiple laws, including those related to anti-money laundering and sanctions. Binance’s former CEO, Changpeng Zhao, was required to pay $4 billion as part of a settlement in November 2023.
Despite the issues surrounding the BUSD partnership, the firm’s resolution with the NYDFS indicates that the company is working to strengthen its internal processes and comply with regulatory expectations moving forward. The settlement also reflects the growing importance of regulatory clarity in the cryptocurrency industry, particularly around anti-money laundering practices and consumer protection.
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