NEW YORK, Aug 7 (Reuters) - Paxos Trust reached a $48.5

million settlement to resolve New York charges the virtual

currency company failed to police illegal activity related to

cryptocurrency exchange Binance, the state's financial services

regulator said on Thursday.

Adrienne Harris, New York's financial services

superintendent, said Paxos will pay a $26.5 million civil fine

and spend $22 million to upgrade its compliance program.

Paxos previously partnered with Binance, the world's largest

cryptocurrency exchange, to market and distribute the Binance

USD stablecoin.

New York's Department of Financial Services said Paxos

lacked effective controls to monitor wrongdoing at Binance,

failed to escalate red flags to senior management, and had

systemic failures in its anti-money laundering program.

The regulator said it ordered Paxos to review Binance's

exposure to illegal activity, which found that from July 2017 to

November 2022 about $1.6 billion of transactions on Binance's

platform involved illicit actors, including Ponzi schemers and

people sanctioned in darknet marketplaces.

Binance also processed transactions involving entities

sanctioned by the U.S. Office of Foreign Assets Control, the

review found.

New York ordered Paxos in February 2023 to stop issuing

Binance's stablecoin. Paxos subsequently ended its partnership

with Binance.

In a statement, Paxos said it was pleased to settle. It also

said it has "fully remediated" the compliance issues, customer

accounts were not affected, and consumers were not harmed.

Binance was not a defendant in the New York case.

It entered a guilty plea in November 2023 and accepted a

$4.32 billion criminal penalty for violating federal anti-money

laundering and sanctions laws.

The U.S. Securities and Exchange Commission dismissed its

own civil case against Binance in May, reflecting a change in

approach toward cryptocurrencies during U.S. President Donald

Trump's second White House term.