FATF flags AML risks from peer-to-peer stablecoin transfers, points to freeze and deny-list safeguards

The Financial Action Task Force warned that peer-to-peer transfers of stablecoins via “unhosted” wallets create gaps in global anti-money laundering controls, pointing to issuer freeze and deny-list capabilities as potential safeguards against illicit finance.

“Stablecoin issuers are encouraged to implement technical measures to be able to block, freeze, and withdraw stablecoins at any time,” FATF said in its “Targeted Report on Stablecoins and Unhosted Wallets” report released Tuesday, noting that these assets are often used to “obfuscate the origin of funds and distance it from the intended use.”

The global anti-money laundering watchdog’s 42-page publication draws on more than 50 submissions from members of the FATF Global Network and includes case studies from France, Canada, India, and Singapore.

The FATF identified peer-to-peer transfers via “unhosted” wallets as a “key vulnerability” in the stablecoin ecosystem. These transactions occur directly between individuals without the involvement of a regulated intermediary VASP or financial institution, placing them outside standard AML/CFT obligations. 

Notably, the report said that state-linked cybercriminal groups, including North Korea’s Lazarus Group, have rapidly adopted stablecoins as a preferred method for laundering proceeds from ransomware, phishing, and other cyber-enabled crimes, often converting stolen funds into USDT on the Tron blockchain before cashing out through over-the-counter brokers.

Iranian actors have also leveraged stablecoins to finance proliferation and evade sanctions, according to the report.

Beyond freeze and deny-list capabilities, the FATF said jurisdictions should consider requiring stablecoin issuers to conduct customer due diligence at redemption, implement transaction limits, and establish 24/7 law enforcement contact points capable of executing expedient asset freezes. The report also encourages supervisors to develop technical expertise in smart contract functionalities and cross-chain transaction mechanics.

Parallel risks to traditional finance

Separately, the European Central Bank published a working paper examining how stablecoin adoption could affect bank intermediation and monetary policy transmission. The paper, released as part of the ECB’s working paper series, analyzes confidential granular data on euro area banks and their individual borrowers.

The ECB study found that stablecoin adoption induces a “deposit-substitution mechanism,” whereby households and firms reallocate funds from retail bank deposits to digital assets. This reallocation increases banks’ reliance on wholesale funding and can ultimately constrain their intermediation capacity, according to the paper. The authors document that stablecoins alter the pass-through of policy rates to bank funding costs and lending conditions, potentially weakening the predictability of policy actions.

The paper also warned that widespread adoption of foreign-currency-denominated stablecoins, particularly those pegged to the U.S. dollar, could import foreign monetary conditions into the euro area. Banks with greater exposure to U.S. dollar funding exhibit a weaker loan-supply response to domestic monetary policy shocks, indicating a potential erosion of monetary sovereignty, the ECB found.

Mainstream adoption continues

Despite the risks outlined by regulators, stablecoin usage for everyday financial purposes continues to expand. A recent multi-firm study found that 54% of surveyed crypto users held stablecoins in the past year, with 56% planning to acquire more. Holders allocate approximately one-third of their total savings to crypto and stablecoins, signaling a shift from purely speculative activity toward core wealth allocation, according to the survey.

The study also found that about 35% of freelancers’ and sellers’ annual earnings are now paid in stablecoins, with nearly three-quarters of respondents reporting that stablecoin acceptance has improved their ability to work internationally.

According to The Block’s data dashboard, the total supply for U.S. dollar-denominated stablecoins stands at $294.5 billion. Tether’s USDT remains the dominant asset in this category, accounting for nearly $184 billion, or approximately 62.5% of the total USD-pegged supply.

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