Regulatory settlement of $48 million between Paxos and the New York Department of Financial Services, allegedly due to AML breaches in relation to Binance.
In a significant move for crypto regulation, Paxos, a New York-based blockchain infrastructure provider, has agreed to pay a $75 million settlement to the New York Department of Financial Services (NYDFS) for compliance failures with Binance, one of the world's largest cryptocurrency exchanges.
The NYDFS identified systemic issues in Paxos' anti-money laundering (AML) and compliance programs, dating back to 2017, that allowed illicit flows to go undetected. These systemic failures compromised the integrity of Paxos's compliance program and violated expectations for licensed financial institutions.
Specifically, the regulator found that Paxos failed to conduct regular and effective due diligence on Binance, had ineffective transaction monitoring systems, and insufficient know-your-customer (KYC) and customer due diligence (CDD) protocols. As a result, approximately $1.6 billion in transactions linked to criminal and blacklisted entities were processed without sufficient oversight, exposing Paxos to potential illicit activity.
The settlement underscores NYDFS’s active role in crypto regulation and its insistence on robust risk management frameworks, especially when dealing with high-risk partners like Binance. The regulator considered Paxos's KYC procedures as "unsophisticated," allowing users with shared addresses, overlapping documents, and suspicious behavior to open multiple accounts undetected.
Paxos' poor transaction monitoring system failed to catch clear signs of money laundering, and the firm had no clear rules for launching investigations after receiving law enforcement requests, which further delayed the detection of illicit activity on the platform. The NYDFS found that Paxos did not have proper controls in place to monitor for serious illegal activity happening on or through the Binance exchange.
As part of the settlement, Paxos is required to pay a $26.5 million fine and invest an additional $22 million to improve its compliance controls to meet regulatory standards. The company will also cease minting Binance USD (BUSD) stablecoins by February 2023 following NYDFS orders.
Paxos, licensed in 2015, was authorized to operate in the virtual currency space. The firm entered a partnership with Binance to issue, market, and distribute BUSD. However, the earlier partnership allowed users in the U.S. to access Binance's unlicensed exchange due to lax geofencing.
The settlement is to resolve allegations of inadequate due diligence on Paxos' former partner, Binance. The review of historical transactions between 2017 and 2022, focusing on selected digital assets, revealed that approximately $1.6 billion that moved through Binance was linked to criminal activity.
It's important to note that the issues identified were historical and have been fully resolved, according to Paxos, and did not impact customer accounts. The company has since rebranded itself as a compliance-focused blockchain infrastructure provider. Paxos continues to operate other regulated stablecoins, including Pax Dollar (USDP) and PayPal USD (PYUSD).
This marks the "first orderly wind down of a stablecoin," according to the NYDFS, underscoring the increasing focus on compliance and regulation in the cryptocurrency industry. The settlement serves as a reminder for all crypto companies to prioritize robust compliance measures to protect their users and maintain trust in the industry.
- Despite Paxos' past compliance failures with Binance, revealed to be systemic issues in their anti-money laundering program that dated back to 2017, the cryptocurrency industry is now refocusing on compliance and regulation, with Paxos rebranding as a compliance-focused blockchain infrastructure provider.
- In general-news, the NYDFS' settlement with Paxos, a New York-based blockchain infrastructure provider, for compliance failures with Binance, a major cryptocurrency exchange, highlights the growing need for crypto companies to prioritize robust compliance measures to protect users and maintain industry trust.
- The compliance lapses identified by the NYDFS in Paxos' dealings with Binance, including insufficient know-your-customer protocols, ineffective transaction monitoring systems, and poor risk management frameworks, have led to an agreement requiring Paxos to pay a $75 million settlement and improve their compliance controls, as well as ceasing the minting of Binance USD stablecoins by February 2023.
