The New York Department of Financial Services (NYDFS) recently announced a hefty penalty of $48.5 million imposed on Paxos, a stablecoin issuer. This enforcement action includes a civil monetary fine of $26.5 million and requires Paxos to invest an additional $22 million over three years to enhance its compliance systems.
The penalty comes after an extensive investigation into Paxos’ compliance failures concerning anti-money laundering (AML) and customer due diligence procedures. One of the focal points of the investigation was Paxos’ relationship with Binance, the largest cryptocurrency exchange by trading volume.
Paxos had collaborated with Binance to issue the Binance USD (BUSD) stablecoin, but failed to conduct adequate due diligence on the exchange, violating the terms of a 2020 agreement with the NYDFS. A review of Binance transactions between 2017 and 2022 revealed that $1.6 billion worth of transactions were associated with illicit actors or entities sanctioned by the US Office of Foreign Assets Control (OFAC).
As a result of these findings, the NYDFS directed Paxos to cease the issuance of BUSD in February 2023, effectively ending their partnership with Binance and phasing out BUSD from the market.
In addition to the issues with Binance, the NYDFS identified broader systemic compliance issues within Paxos. These included weak Know-Your-Customer (KYC) protocols, delayed responses to law enforcement inquiries, and outdated manual transaction monitoring systems that failed to detect suspicious activity and money laundering patterns.
Furthermore, Paxos lacked internal policies to determine when to initiate investigations after receiving a law enforcement request, limiting their ability to identify and respond to high-risk behavior promptly.
This enforcement action is part of a larger trend in New York’s regulatory approach to the cryptocurrency industry. The NYDFS has previously taken enforcement actions against companies such as Robinhood, Block Inc., and Genesis. Superintendent Adrienne Harris emphasized the agency’s commitment to protecting financial markets and consumers through examinations, supervision, and enforcement.
In conclusion, the penalty imposed on Paxos underscores the importance of robust compliance measures in the cryptocurrency industry. By holding companies accountable for their actions and ensuring adherence to regulatory standards, the NYDFS aims to maintain the integrity of the financial markets and protect consumers.