Regulatory Action
New York’s Department of Financial Services (NYDFS) announced a $26.5 million fine against Paxos Trust Company for systemic failures in its anti-money laundering (AML) and compliance frameworks. The penalty stems from shortcomings identified in the company’s past partnership with Binance to issue the Binance USD (BUSD) stablecoin, including inadequate transaction monitoring and deficient know-your-customer (KYC) controls.
Investigation Findings
NYDFS’s investigation revealed that Paxos lacked appropriate controls to detect illicit transactions occurring through Binance. Between 2017 and 2022, approximately $1.6 billion in flows linked to illicit actors bypassed due diligence safeguards. When red flags emerged, Paxos failed to escalate concerns to senior management or the board of directors.
Remediation Requirements
In addition to the monetary penalty, Paxos must invest $22 million in enhancements to its compliance program. Required improvements include upgrading transaction monitoring systems, strengthening KYC processes to prevent account layering, and establishing robust escalation protocols for law enforcement requests. The consent order outlines a timetable for remedial action and requires periodic reporting to NYDFS.
Industry Implications
The enforcement action underscores the critical importance of AML and KYC rigor in stablecoin issuance. Financial institutions and crypto service providers are reminded of their obligations to maintain risk management frameworks proportionate to business relationships and transactional volumes. NYDFS superintendent Adrienne A. Harris emphasized the department’s commitment to protecting consumers and safeguarding market integrity.
Historical Context
In February 2023, NYDFS became the first regulator to order Paxos to cease minting BUSD amid safety and soundness concerns. The directive prompted federal and international regulators to follow suit. The current fine represents the culmination of NYDFS’s supervisory actions and an affirmation of its lead role in virtual currency oversight.
Company Response
Paxos described the compliance issues as historical matters identified over two and a half years ago and asserted that no customer accounts were impacted. Company leadership expressed commitment to full remediation and ongoing cooperation with regulators. Paxos’s white-labeled stablecoins continue to operate under separate arrangements, with no current regulatory actions pending.
Looking Ahead
The case may serve as a precedent for future enforcement in the stablecoin sector. Market participants will monitor NYDFS’s review of remediation progress and potential follow-on guidance. Enhanced regulatory scrutiny may prompt other issuers to reevaluate internal controls and bolster compliance investments.
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