Paxos Explores Insincerity: An Analysis

In a significant turn of events, Paxos, a blockchain and tokenization platform founded in 2012, has settled with the New York Department of Financial Services (NYDFS) over deficiencies in its BSA/AML compliance function and a deficient compliance user interface.

The settlement, which was announced in 2023, reveals that Paxos' compliance failures were significant and occurred over a long period. This contradicts the company's public claims of a regulatory-first approach.

Paxos' CEO, Charles Cascarilla, had claimed in 2020 that the company had a regulatory-first approach and considered themselves as creating financial market infrastructure. However, prior to 2022, Paxos did not require an investigation upon receipt of a law enforcement request.

The NYDFS found Paxos' BSA/AML function to be deficient in 2023, with the settlement indicating that Paxos made no real attempt to follow the rules between getting their licenses in 2015 and the conduct in 2023. Only after repeated demands from the New York regulator and hiring a real auditor did Paxos begin making progress.

One of the key issues highlighted in the settlement is Paxos' Investigation Failures. The company was found to have not complied with investigations and regulations, with employees aware of compliance issues for years. Conversations indicate that many clients onboarded by Paxos were likely unlicensed money services businesses, and many export or trading companies on the platform were fake.

In response to the NYDFS settlement, Paxos admitted that problems were not resolved over half a decade. The company also failed a NY examination in 2023, failing to demonstrate appropriate controls and not escalating red flags to senior management.

In a bid to rectify the situation, Paxos finally hired a dedicated chief compliance officer (CCO) in September 2022.

The settlement does not charge anyone criminally. It does, however, include a Consent Order in Connecticut, where Paxos assured the Commissioner that the violation alleged would not occur in the future.

Paxos' largest product, BUSD, was forcibly shut down with no visible external problems in 2023. In December 2021, the same CEO testified to the US House Financial Services Committee about the potential benefits of digital assets and blockchain technologies for solving problems in the global financial market infrastructure.

In 2024, Charles Cascarilla released an open letter to a US presidential candidate, claiming that the company had always built within established regulatory frameworks and faced numerous examples of regulatory overreach and onerous legal actions.

The settlement between Paxos and the NYDFS marks a significant milestone in the regulation of the blockchain and tokenization industry, emphasizing the importance of compliance and oversight in the sector.