The New York Department of Financial Services (NYDFS) reached a $48.5 million settlement with crypto infrastructure company Paxos over its partnership with Binance and alleged failure to uphold sufficient anti-money laundering provisions.
Paxos agreed to pay New York state a $26.5 million penalty and will spend an additional $22 million to overhaul its compliance program, according to Thursday’s announcement.
NYDFS said Paxos failed to conduct regular due diligence on Binance and saw about $1.6 billion in illicit flows from and to the crypto exchange via its stablecoin Binance USD (BUSD).
The regulator ordered Paxos to stop distributing the stablecoin in February 2023. NYDFS superintendent Adrienne A. Harris said:
“Regulated entities must maintain appropriate risk management frameworks that correspond to their business risks, which include relationships with business partners and third-party vendors.”
Anti-money laundering regulations and know Your Customer (KYC) regulations have become a hot-button issue in the cryptocurrency industry, with many companies seeking regulatory clarity on their legal liabilities and responsibilities under the law.
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Paxos faced pushback from the SEC and NYDFS over Binance stablecoin
The US Securities and Exchange Commission (SEC) sent a Wells Notice, a warning of potential legal action, to Paxos regarding the BUSD stablecoin in February 2023.
SEC officials accused Paxos of distributing “unregistered securities” and violating consumer protection laws by partnering with Binance to distribute the stablecoin. However, the SEC withdrew the Wells Notice in 2024.
One day later, NYDFS likewise accused Paxos of selling “unregistered securities,” forcing the company to stop distributing the BUSD stablecoin.
New York’s financial regulator also said the lack of KYC controls was one of the several reasons for the notice.
“Per DFS requirements, Paxos is required to conduct due diligence on every new customer,” a February 2023 notice from NYDFS said.
At the time, the regulator also said that although it “authorized Paxos to issue BUSD on the Ethereum blockchain,” it did not authorize “Binance-Peg BUSD” to be issued on any blockchain.
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