Paxos, a prominent crypto infrastructure firm, has agreed to a $48.5 million settlement with the New York Department of Financial Services (NYDFS) over its partnership with Binance and alleged shortcomings in anti-money laundering compliance. The deal includes a $26.5 million penalty and $22 million in mandated compliance upgrades, according to Thursday’s announcement.

Regulators found that Paxos failed to conduct adequate due diligence on Binance, allowing roughly $1.6 billion in illicit transactions to move through its Binance USD (BUSD) stablecoin. In February 2023, the NYDFS ordered Paxos to halt BUSD issuance, citing weak Know Your Customer (KYC) controls and unapproved Binance-linked stablecoins on blockchains beyond Ethereum.

NYDFS Superintendent Adrienne A. Harris emphasized that regulated firms must have risk management frameworks that match their business exposures, including partnerships with third-party vendors.

The settlement follows intense regulatory scrutiny from both the NYDFS and the U.S. Securities and Exchange Commission (SEC). In February 2023, the SEC issued a Wells Notice accusing Paxos of issuing unregistered securities through its BUSD partnership with Binance. While the SEC dropped the notice in 2024, NYDFS maintained its position, underscoring compliance gaps.

Paxos stressed that the compliance issues were historical, dating back more than two years, and have since been fully resolved. The company also noted that there are no new allegations involving Binance or BUSD.

The case highlights growing pressure on crypto companies to strengthen anti-money laundering and KYC measures as regulators worldwide tighten oversight on digital assets. For Paxos, the multimillion-dollar penalty serves as both a costly resolution and a warning to others navigating the fine line between innovation and compliance.