Paxos Reaches $48.5M Settlement with NYDFS Over Binance Partnership and AML Lapses

Paxos, a leading crypto infrastructure provider, has agreed to a $48.5 million settlement with the New York Department of Financial Services (NYDFS) following allegations that the company failed to uphold robust anti-money laundering (AML) and Know Your Customer (KYC) standards in its partnership with Binance. The regulatory crackdown and subsequent penalty highlight intensifying scrutiny on stablecoin issuers and the need for rigorous compliance in the crypto sector.

NYDFS Slaps Paxos with Multi-Million Dollar Fine

The NYDFS announced the settlement on Thursday, outlining that Paxos will pay New York state a $26.5 million fine and invest an additional $22 million into overhauling its compliance and risk management systems. The regulator cited Paxos’ lack of ongoing due diligence on Binance, which led to an estimated $1.6 billion in illicit transactions flowing to and from the exchange via Binance USD (BUSD), the stablecoin Paxos helped issue.

Superintendent Adrienne A. Harris emphasized that adequate AML and KYC protocols must be foundational to any regulated crypto business, signaling that the state expects next-generation standards for screening, monitoring, and customer verification.

What Went Wrong: Compliance Oversight and Stablecoin Exposures

The NYDFS previously ordered Paxos to halt BUSD distribution in February 2023, after identifying significant lapses in its due diligence processes with Binance accounts and customers. The regulator reported that Paxos failed to:

• Conduct ongoing, comprehensive due diligence on Binance and related entities
• Adequately monitor transactions for suspicious activity and potential illicit finance
• Enforce strict KYC checks for new customers, especially concerning third-party stablecoin issuance

The agency clarified that while it had authorized Paxos to issue Ethereum-based BUSD, it never approved “Binance-Peg BUSD” on other blockchains, widening the regulatory gap.

SEC and Regulatory Pressures on Paxos

Paxos also faced a Wells notice from the U.S. Securities and Exchange Commission (SEC) in February 2023, accusing the firm of issuing unregistered securities and violating investor protections through its BUSD partnership with Binance. While the SEC later withdrew the Wells notice in 2024, the episode underscored how uncertainty and competing regulatory definitions continue to challenge stablecoin projects operating in the U.S.

Both NYDFS and SEC actions were driven in part by perceived deficiencies in Paxos’ processes for monitoring customer risk and preventing money laundering a hot-button issue amid growing calls for regulatory clarity in digital asset markets.

Paxos’ Response and Compliance Remediation

In response to the penalty, Paxos has affirmed its commitment to strong compliance, noting that the infractions identified by the NYDFS are historical and were addressed more than two years ago. The company’s spokesperson stated:

“There are no new claims regarding Paxos’ relationship with Binance or the issuance of BUSD. The compliance issues discussed are historical issues that have been fully remediated.”

Paxos pledged to invest further in its internal controls and monitoring to ensure full transparency and meet New York’s strict regulatory requirements.

Key Takeaways for Crypto Compliance and Stablecoin Issuers

• Stricter Oversight: Regulators expect ongoing AML and KYC diligence, not just initial onboarding checks, especially for fiat-backed stablecoin issuers.
• Operational Risk: Partnerships with major exchanges like Binance demand continual risk assessment to prevent regulatory breaches and illicit flows.
• Market Impact: The settlement sends a strong message to other companies in the crypto industry sound compliance is non-negotiable for long-term success and regulatory approval.
• Stablecoin Future: As global and U.S. authorities increase scrutiny, stablecoin issuers will need to double down on robust compliance frameworks to avoid costly fines and ensure smooth operations across multiple jurisdictions.

The Paxos-NYDFS settlement spotlights the evolving landscape of crypto regulation and signals that, as digital assets gain traction in the mainstream economy, oversight measures and accountability will only intensify for every institution involved in the ecosystem.