The settlement is related to the digital currency company’s failure to conduct proper due diligence into cryptocurrency exchange Binance, its former partner, according to a Thursday (Aug. 7) press release.
NYDFS also found “systemic failures” in Paxos’ anti-money laundering (AML) program, the release said. In addition to a $26.5 million penalty due to those deficiencies, Paxos will invest $22 million into its compliance program.
“Regulated entities must maintain appropriate risk management frameworks that correspond to their business risks, which includes relationships with business partners and third-party vendors,” NYDFS Superintendent Adrienne A. Harris said in the release. “The department continues taking significant steps to ensure accountability, in turn protecting consumers and safeguarding the integrity of the financial system.”
Paxos did not reply to PYMNTS’ request for comment.
Paxos had an arrangement with Binance to market and distribute Binance’s dollar-pegged stablecoin, according to the release. An agreement with NYDFS required Paxos to conduct regular due diligence of its partner. However, a NYDFS investigation found the company “did not have appropriate controls in place to effectively monitor for significant illicit activity occurring at or through Binance…”
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“Notably, Binance’s lax geofencing restrictions enabled U.S. users to access an unregulated exchange,” the release said.
The investigation found that, between 2017 and 2022, $1.6 billion in transactions flowed to or from the Binance platform involving fraudsters, per the release. Binance processed transactions to and from entities already sanctioned by the United States.
Defects in the Paxos transaction monitoring system kept the company from spotting money laundering, the release said. The company also lacked proper guidelines for handling investigations following a law enforcement request, further keeping it from identifying fraudsters on its platform.
NYDFS was the first regulator in the world to call into question Binance’s safety and soundness in 2023, according to the release. Binance was later fined $4.3 billion by federal regulators, part of a larger crypto crackdown that has since been scaled back.
Under President Donald Trump, the government’s approach to crypto enforcement has changed and narrowed, with the Department of Justice now focusing on crypto cases tied to terrorism, drug trafficking and organized crime.
