The New York Department of Financial Services (NYDFS) has imposed a $26.5 million fine on Paxos, a stablecoin issuer based in New York City, due to significant lapses in its compliance and anti-money laundering protocols, including those associated with its former partnership with the global cryptocurrency exchange Binance, as announced on Thursday. In conjunction with the fine, Paxos has committed to investing an additional $22 million to upgrade its compliance program, ensuring it meets the standards set by the NYDFS. According to NYDFS Superintendent Adrienne Harris, "The Department of Financial Services has been at the forefront of regulating the virtual currency industry, ensuring consumer protection and market integrity through rigorous examinations, supervision, and enforcement when necessary. It is essential for regulated entities to maintain robust risk management frameworks that align with their business risks, including relationships with partners and third-party vendors.
The Department will continue to take decisive action to ensure accountability, thereby safeguarding consumers and the integrity of the financial system." The compliance shortcomings identified by the NYDFS were primarily linked to Paxos' past collaboration with Binance, the world's largest cryptocurrency exchange. The two companies partnered in 2019 to launch Binance's dollar-pegged stablecoin, BUSD. However, this partnership ultimately led to Paxos facing regulatory issues: in 2023, the NYDFS initiated an investigation into Paxos' issuance of BUSD, and the U.S. Securities and Exchange Commission (SEC) issued a Wells notice to Paxos, indicating its intention to pursue legal action (although the SEC later dropped its enforcement action).
Subsequently, Paxos ceased issuing BUSD altogether, as directed by the NYDFS. The fine announced on Thursday stems from NYDFS' initial investigation. The investigation revealed that Paxos lacked adequate controls to effectively monitor and prevent illicit activities conducted through Binance. Furthermore, when such activities were detected, the company failed to report them to its senior management and board members, according to the regulator.
In addition to the compliance issues related to Binance, the NYDFS investigation uncovered other deficiencies in Paxos' compliance program. These included a rudimentary Know Your Customer (KYC) program that allowed malicious actors to create multiple accounts without detection and a flawed transaction monitoring system that hindered Paxos' ability to identify obvious money laundering patterns. A Paxos representative characterized the compliance failures identified by the NYDFS as "historical issues" that were detected over two and a half years ago and have since been fully addressed. The representative emphasized that these issues "had no impact on customer accounts and did not result in any consumer harm." "This marks the resolution of this matter, and we are pleased to move forward," the representative stated.
"There are no new allegations regarding Paxos' relationship with Binance or the issuance of BUSD, and Paxos' other white-labeled stablecoins, which operate on similar models with different partners, have not encountered any regulatory issues."