- Paxos Trust reached a settlement with the New York Department of Financial Services (NYDFS), agreeing to pay a $26.5 million penalty and invest $22 million in compliance improvements.
- The case stemmed from Paxos‘ work with the Binance BUSD stablecoin, which ended in early 2023 after regulatory intervention.
- The NYDFS found that Paxos did not have adequate systems to detect and prevent illegal activity connected to Binance, which processed $1.6 billion in illicit transactions.
- Paxos responded by stating the compliance issues are historical, have been resolved, and that the company has taken steps to improve its oversight.
- The company claims its management of stablecoins remains strong, with no new regulatory actions on its other products.
In February 2023, the New York Department of Financial Services (NYDFS) instructed Paxos Trust to halt the issuance of the Binance BUSD stablecoin for the cryptocurrency exchange Binance. Paxos has now agreed to a $26.5 million penalty and will invest $22 million to upgrade its compliance program following a settlement with the regulator.
The regulatory action comes after Binance settled separately with the Department of Justice last year for $4.3 billion over anti-money laundering and compliance violations. The NYDFS stated that Paxos lacked effective controls to monitor potentially illegal activity on Binance. According to the regulator, Binance processed $1.6 billion in illicit transactions, though this figure does not necessarily cover only stablecoin transactions.
The NYDFS also said its investigation revealed that Paxos had operated a “deficient compliance program for years.” The department noted weaknesses in Paxos‘ “know your customer” (KYC) and due diligence procedures. “In addition to Paxos’s failures related to Binance, the Department’s investigation revealed that Paxos operated a deficient compliance program for years,” the NYDFS said.
In response, a Paxos spokesperson said these issues were from over two years ago and have been fully addressed. “Paxos successfully wound down more than $16 billion in BUSD market cap without the token ever de-pegging which was a testament to the strength of Paxos’ treasury management. There are no new claims regarding Paxos’ relationship with Binance or the issuance of BUSD, and Paxos’ other white-labeled stablecoins operate on similar models with different partners and have not faced any regulatory issues,” the company said. Paxos also affirmed its commitment to regulatory compliance and said it has invested in improving its compliance operations.
The settlement has impacted Paxos‘ position in the industry. The company previously acted as custodian for EDX Markets, the digital asset platform founded by Citadel Securities, Charles Schwab, and others. After regulatory actions, Paxos was replaced in that role.
Paxos operates as a trust, a legal structure that offers stronger client protection in bankruptcy but limits the number of blockchains it can support. By contrast, stablecoin provider Circle operates more broadly but has now applied for a national trust charter. The timing of the settlement comes as the stablecoin sector experiences renewed growth.
For further details, see the NYDFS press release and Paxos Trust.
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