Paxos Trust Company has agreed to a $48.5 million settlement with the New York State Department of Financial Services (NYDFS) over allegations it failed to monitor illicit activity linked to its former partner, cryptocurrency exchange Binance.
In a press release, the regulator said it found that Paxos failed to properly monitor its relationship with Binance, one of the world’s largest cryptocurrency exchanges.
The penalty includes a $26.5 million fine and a commitment by Paxos to spend $22 million improving its internal compliance systems.
Why Paxos Was Fined
Paxos, which is licensed in New York to operate in crypto, partnered with Binance in 2019 to issue a stablecoin called Binance USD (BUSD).
As part of its agreement with DFS, Paxos was supposed to perform regular background checks and monitor for suspicious activity related to Binance.
However, the regulator found that Paxos did not have the right systems in place to detect or report large-scale illicit activity. It failed to raise red flags or take action even when warning signs were present.
For example, Binance allowed U.S. users to access its unregulated exchange through weak geo-blocking, and Paxos did not report this to regulators.
$1.6 Billion in Suspicious Transactions Missed
An investigation by DFS reviewed Binance transactions from 2017 to 2022 and found that $1.6 billion flowed through the exchange to or from bad actors. Some of these transactions involved entities that had been sanctioned by the U.S. government.
Despite these issues, Paxos did not escalate concerns to senior management or its board. The DFS also discovered that Paxos had no clear rules about when to open investigations after receiving requests from law enforcement, further delaying action against suspicious users.
In 2023, DFS said it took the first major regulatory step by ordering Paxos to stop minting BUSD, effectively winding down the stablecoin. Other global regulators quickly followed suit with similar actions against Binance.
A Broken Compliance System?
In addition to its failures related to Binance, Paxos was found to have a weak overall compliance setup. Its customer onboarding system failed to identify accounts that shared personal data or addresses, indicating possible money laundering.
The transaction monitoring tools Paxos used were also described as “unsophisticated” and unable to spot obvious signs of fraud or criminal behavior.
These gaps made it easy for bad actors to slip through the cracks. DFS said Paxos’s compliance team lacked the tools and structure needed to deal with today’s crypto risks.
What’s Next for Paxos
As part of the settlement, Paxos has agreed to spend $22 million to strengthen its compliance program and fix the problems identified by DFS. This includes improving its transaction monitoring system, onboarding processes, and cooperation with law enforcement.
DFS Superintendent Adrienne Harris said this enforcement action reinforces the need for crypto companies to take their compliance responsibilities seriously.
“The Department continues taking significant steps to ensure accountability,” she said, “in turn protecting consumers and safeguarding the integrity of the financial system.”
Last year, the SEC dropped its probe into Paxos over its BUSD stablecoin, one year after issuing a Wells Notice to the firm.
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