Paxos Trust Company has reached a $48.5 million settlement with the New York State Department of Financial Services (NYDFS) following allegations of failure to monitor illicit activity associated with its former partner, Binance. The regulator found that Paxos did not adequately oversee its relationship with Binance, one of the world’s largest cryptocurrency exchanges. The settlement includes a $26.5 million fine and a commitment by Paxos to invest $22 million in enhancing its internal compliance systems.
Why Paxos Was Fined
Paxos collaborated with Binance in 2019 to issue a stablecoin called Binance USD (BUSD). As part of its agreement with NYDFS, Paxos was responsible for conducting regular background checks and monitoring for suspicious activity related to Binance. However, the regulator discovered that Paxos lacked the necessary systems to detect or report significant illicit activity. It failed to raise alerts or take action even when warning signs were evident. For instance, Binance allowed U.S. users to access its unregulated exchange through weak geo-blocking, which Paxos failed to report to regulators.
$1.6 Billion in Suspicious Transactions Missed
An investigation by NYDFS examined Binance transactions from 2017 to 2022 and identified $1.6 billion in transactions involving bad actors, some of whom were sanctioned by the U.S. government. Despite these findings, Paxos did not escalate concerns to senior management or its board. NYDFS also uncovered that Paxos lacked clear guidelines on when to initiate investigations after receiving requests from law enforcement, resulting in delays in addressing suspicious users. In 2023, NYDFS ordered Paxos to cease minting BUSD, effectively winding down the stablecoin, with other global regulators subsequently taking similar actions against Binance.
A Broken Compliance System?
Apart from its shortcomings related to Binance, Paxos was found to have an overall weak compliance setup. Its customer onboarding system failed to identify accounts sharing personal data or addresses, suggesting potential money laundering. The transaction monitoring tools used by Paxos were described as “unsophisticated” and incapable of detecting obvious signs of fraud or criminal activity, making it easy for bad actors to evade detection. NYDFS emphasized that Paxos’s compliance team lacked the necessary tools and structure to address contemporary crypto risks.
What’s Next for Paxos
As part of the settlement, Paxos has committed to investing $22 million in strengthening its compliance program and rectifying the issues identified by NYDFS. This includes enhancing its transaction monitoring system, onboarding processes, and collaboration with law enforcement. NYDFS Superintendent Adrienne Harris underscored the importance of crypto companies taking their compliance responsibilities seriously, emphasizing the department’s dedication to ensuring accountability, protecting consumers, and upholding the financial system’s integrity.
Paxos Defends Compliance Track Record Amid Settlement Fallout
In response to the settlement, a Paxos spokesperson reiterated the company’s commitment to regulatory compliance, highlighting the successful wind-down of over $16 billion in BUSD following NYDFS’s order to halt new issuance. The spokesperson emphasized that there were no new allegations concerning Paxos’s prior relationship with Binance or the issuance of BUSD, with other white-label stablecoins developed by Paxos under similar frameworks facing no regulatory issues. Paxos reaffirmed its dedication to upholding regulatory standards in the future, citing its foundation built on compliance. Additionally, the SEC dropped its investigation into Paxos over its BUSD stablecoin, one year after issuing a Wells Notice to the firm.
In conclusion, the settlement between Paxos and NYDFS underscores the importance of robust compliance measures in the crypto industry. As Paxos works to enhance its internal systems, the focus on regulatory adherence and consumer protection remains paramount in safeguarding the integrity of the financial system.