New York Financial Authority takes strong action, Paxos faces nearly $50 million in settlement fees
The New York State Department of Financial Services (NYDFS) announced on August 7 that it imposed a hefty fine of $48.5 million on cryptocurrency infrastructure company Paxos Trust, due to its partnership with the world's largest cryptocurrency exchange, Binance, and its failure to maintain adequate anti-money laundering mechanisms.
According to the settlement agreement, Paxos will pay $26.5 million in civil fines to New York State and must invest an additional $22 million in strengthening its compliance system over the next three years. NYDFS pointed out that Paxos failed to conduct regular due diligence on Binance, leading to approximately $1.6 billion in illegal fund flows through its stablecoin Binance USD ($BUSD).
NYDFS Director Adrienne A. Harris stated: 'Regulated entities must maintain appropriate risk management frameworks commensurate with their business risks, including relationships with business partners and third-party vendors.'
$BUSD partnership lays hidden dangers, $1.6 billion suspicious transactions exposed
The core of the enforcement action focuses on the partnership between Paxos and Binance. The two companies began collaborating in 2018 to issue the $BUSD stablecoin, which claims to be pegged to the U.S. dollar on a one-to-one basis and offers trading services on the Binance exchange, with Paxos acting as custodian and issuer.
However, the NYDFS investigation found that Paxos violated the terms of the agreement signed with regulators in 2020 by failing to conduct adequate due diligence on the world's largest cryptocurrency exchange. Regulators discovered that transactions worth $1.6 billion were related to illegal actors or entities sanctioned by the U.S. Office of Foreign Assets Control (OFAC) during their review of Binance's transaction records from 2017 to 2022.
According to the consent order, NYDFS stated that Paxos had requested Binance to 'provide geofencing control assurances to ensure U.S. customers cannot access unregulated trading platforms.' Binance's compliance officer responded at the time, stating: 'I can confidently say that the relevant policies and procedures are in place,' and reiterated that Binance.com 'completely restricts U.S. persons' from using it. However, Paxos accepted the exchange's statements without conducting an independent review, which became the root of subsequent issues.
Systemic compliance defects exposed, KYC mechanisms are virtually non-existent
In addition to the collaboration issues with Binance, NYDFS also found that Paxos faced broader systemic compliance issues. The investigation revealed significant flaws in the company's anti-money laundering (AML) system, including weak customer identification (KYC) protocols and delayed responses to inquiries from law enforcement.
Regulators pointed out that Paxos's transaction monitoring system is outdated and relies on manual operations, making it unable to detect coordinated suspicious activities and obvious money laundering patterns. Many users share similar addresses, documents, or ownership information, indicating coordinated illegal activities, yet these high-risk users can easily pass scrutiny.
More seriously, Paxos lacks clear internal policies to decide when to initiate investigations upon receiving requests from law enforcement. This oversight limited the company's ability to timely identify and respond to high-risk behaviors, turning the platform into a breeding ground for money laundering activities.
The investigation also found that the company failed to establish effective early warning mechanisms to identify behavioral patterns indicative of money laundering activities, allowing illegal funds to flow freely on the platform due to these systemic defects.
The regulatory storm continues, BUSD officially exits the market
Faced with regulatory pressure, NYDFS ordered Paxos to stop issuing $BUSD in February 2023, effectively ending the company's partnership with Binance and leading to the gradual exit of $BUSD from the market. (Crypto City) Previously, the U.S. Securities and Exchange Commission (SEC) had issued a Wells Notice to Paxos in February 2023, accusing the company of issuing 'unregistered securities' and violating consumer protection laws, but the SEC withdrew that notice in 2024.
Further Reading
SEC suddenly drops investigation into Paxos! Determines BUSD is 'not a security', netizens comment: Of course, no need to investigate if it collapses
This enforcement action is part of New York's regulatory trend towards the cryptocurrency industry. Over the years, NYDFS has taken enforcement actions against companies including Robinhood, Block Inc. (operator of Cash App), and the now-bankrupt Genesis.
A Paxos spokesperson responded, stating: 'To avoid any doubts, the compliance issues discussed are historical problems discovered two and a half years ago and have been fully resolved. These matters have no impact on customer accounts and have caused no consumer harm. This symbolizes the resolution of the matter, and we are pleased to put it behind us.'
Director Harris reiterated the agency's commitment to protecting financial markets and consumers, stating: 'The Department of Financial Services is leading the nation in regulating the virtual currency industry, protecting consumers and markets through examinations, supervision, and enforcement when necessary.'
As regulators continue to strengthen oversight of the cryptocurrency industry, the industry anticipates facing stricter compliance requirements and enforcement actions.
'Paxos Hit with $48.5 Million Fine! BUSD Cooperation Lays Hidden Dangers, $1.6 Billion Suspicious Transactions Exposed' This article was first published in 'Crypto City'
