Paxful, once one of the largest peer‐to‐peer (P2P) Bitcoin marketplaces, has agreed to pay a $4 million criminal penalty after pleading guilty to multiple federal offenses, the US Department of Justice (DOJ) announced Wednesday.
The charges include conspiracies to promote illegal prostitution, operate an unlicensed money transmitting business, violate the Bank Secrecy Act, and knowingly transmit funds derived from criminal activity.
Paxful’s Compliance Failures
Prosecutors said the company was aware that some customers were using the platform to move proceeds from criminal activity, including fraud schemes and illegal prostitution.
Among the most significant examples cited was Paxful’s relationship with Backpage, a now‐defunct online classifieds site whose owners admitted in criminal proceedings that it profited from illegal prostitution, including advertisements involving minors.
The Justice Department stated that between December 2015 and December 2022, Paxful’s collaboration with Backpage and a related copycat site resulted in nearly $17 million worth of Bitcoin being sent from Paxful wallets to those platforms.
The plea agreement outlines a broader pattern of compliance failures. From July 2015 through June 2019, Paxful and its founders marketed the exchange as not requiring know‐your‐customer (KYC) verification. Customers were allowed to open accounts and conduct transactions without sufficient identity checks.
The company also provided third parties with anti‐money laundering policies that prosecutors said were not actually implemented or enforced. In addition, Paxful failed to file suspicious activity reports despite being aware of illicit conduct on the platform.
As a result, authorities concluded that the exchange became a vehicle for a range of criminal activity, including prostitution, fraud, romance scams, extortion schemes, hacks attributed to malign state actors, and even the distribution of child sexual abuse material.
Cooperation Earns Reduced Sentence
In determining the resolution, the Department of Justice considered the seriousness of the offenses, which involved processing millions of dollars in illicit transactions.
While Paxful did not voluntarily disclose the wrongdoing in a timely manner, it received credit for cooperating with investigators, which included gathering and producing extensive documentation, providing updates from its internal investigation, and undertaking significant remedial measures.
Under the plea agreement, Paxful acknowledged that the appropriate criminal penalty under the law would be $112.5 million. However, after conducting an independent financial analysis, the Justice Department determined that the company lacked the ability to pay that amount. As a result, the penalty was reduced to $4 million.
The case has also ensnared company leadership. On July 8, 2024, Paxful co‐founder and former chief technology officer Artur Schaback pleaded guilty to conspiracy to fail to maintain an effective anti‐money laundering program in connection with the same conduct.
Featured image from OpenArt, chart from TradingView.com
