Paxos Settles with NYDFS for $48M Over Binance and AML Violations

Paxos has agreed to pay $48.5 million to the New York Department of Financial Services (NYDFS).

This is to resolve allegations related to inadequate due diligence on its former partner, Binance, and failures in its anti-money laundering program.

NYDFS Probe Finds Paxos Lacked Oversight

According to an August 7 press release, the terms of the settlement require the stablecoin issuer to pay a $26.5 million fine and invest $22 million in its compliance program. Paxos previously issued the Binance USD (BUSD) stablecoin until 2023, when the NYDFS ordered it to stop over the exchange’s poor geofencing and sanctions controls. According to the regulator, the action was the “first orderly wind down of a stablecoin.”

“Regulated entities must maintain appropriate risk management frameworks that correspond to their business risks, which includes relationships with business partners and third-party vendors,” said Superintendent Adrienne A. Harris.

Paxos, licensed in 2015 as a limited-purpose trust company, was authorized to operate in the virtual currency space. It later entered a partnership with Binance to issue, market, and distribute BUSD.

As part of its regulatory obligations, the firm was required to conduct regular due diligence on Binance. However, New York’s financial watchdog found that it did not have proper controls in place to monitor for serious illegal activity happening on or through the exchange. It also failed to escalate red flags to its senior management and board.

One key issue was Binance’s “lax geofencing,” which allowed users in the U.S. to access its unlicensed exchange. A review of historical transactions between 2017 and 2022, focusing on selected digital assets, revealed that approximately $1.6 billion that moved through it was linked to criminal activity. The investigation also found that the platform had processed payments involving entities that had already been sanctioned by the U.S. Office of Foreign Assets Control (OFAC).

Compliance Issues

Beyond its shortcomings with Binance, the New York regulator also found that Paxos had been running a weak compliance program for years. The company’s Know Your Customer (KYC) procedures were described as “unsophisticated,” allowing users with shared addresses, overlapping documents, and suspicious behavior to open multiple accounts undetected.

Its poor transaction monitoring system also failed to catch clear signs of money laundering. Authorities noted that 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.

Paxos has since moved to rebrand itself as a compliance-focused blockchain infrastructure provider. The company has stated that the issues identified were historical, have been fully resolved, and did not impact customer accounts. It continues to operate other regulated stablecoins, including Pax Dollar (USDP) and PayPal USD (PYUSD).