• Paxos fined $26.5 million by New York DFS
• Failures tied to Binance partnership and AML program gaps
• Required $22 million investment in compliance improvements
• DFS cited ignored red flags and illicit activity
• $1.6 billion in illicit funds flowed through Binance
• Some transactions linked to sanctioned entities
• Paxos says issues fixed with no customer harm
• Wind-down of BUSD maintained dollar peg
• Other stablecoins unaffected by regulatory action
• DFS found broader compliance shortcomings at Paxos

Paxos Trust Co. will pay $26.5 million to the New York Department of Financial Services (DFS) for due diligence failures tied to its former partnership with Binance and broader systemic shortcomings in its anti-money laundering program, the regulator announced Thursday.

In addition to the fine, Paxos must invest $22 million in strengthening its compliance framework under the terms of the settlement.

“The Department of Financial Services has led the nation in regulating the virtual currency industry, protecting consumers and markets through examinations, supervision, and where necessary, enforcement,” Superintendent Adrienne Harris said in a statement.

The resolution stems from a 2023 DFS order that halted Paxos from issuing new Binance USD (BUSD) stablecoins.

The distribution partnership with Binance began in 2019, four years after Paxos was approved by DFS to operate in the virtual currency sector. As part of that approval, Paxos was obligated to conduct due diligence on Binance.

According to DFS, Paxos failed to maintain adequate controls, ignored red flags, and did not address illicit activity. The regulator said U.S. users could bypass restrictions and access an unregulated exchange due to Binance’s weak geofencing. 

Between 2017 and 2022, $1.6 billion in illicit funds moved through Binance, with some transactions involving entities sanctioned by the U.S. Office of Foreign Assets Control.

A Paxos spokesperson said the compliance issues were identified more than two and a half years ago and have since been fully addressed. The firm emphasized there was no customer harm or impact to client accounts.

“Paxos was founded on a deep belief in adherence to regulation and compliance and we have invested significant resources in building a best-in-class compliance operation,” the spokesperson said.

They also highlighted that the wind-down of BUSD occurred without the stablecoin losing its peg to the U.S. dollar — which they described as proof of the company’s strong treasury management.

The spokesperson added that there are no new claims regarding Paxos’ relationship with Binance or the issuance of BUSD, and other white-labeled stablecoins produced by Paxos have not faced regulatory challenges.

DFS noted that its investigation uncovered compliance shortcomings at Paxos extending beyond the BUSD-related concerns.