The Financial Intelligence Analysis Unit (FIAU) wishes to inform subject persons that the Financial Action Task Force (FATF) has published a new report titled, ‘Targeted Report on Stablecoins and Unhosted Wallets – Peer-to-Peer Transactions’. This report discusses illicit finance risks arising from criminals’ misuse of stablecoins, especially through peer-to-peer (P2P) transactions via unhosted wallets.
The stability, liquidity, and interoperability of stablecoins are meant for legitimate purposes but are still exploited by criminals, including state-linked cybercriminal groups, who use stablecoins for money laundering from cybercrimes and to fund proliferation.
The primary vulnerability arises because P2P transactions through unhosted wallets occur directly between individuals or entities without involving a regulated intermediary Virtual Asset Service Provider (VASP) or financial institution. Another weakness faced by stablecoin issuers is managing cross-chain activities, as transaction trails can become obscured.
Subsequently, the FATF encourages countries to fully implement Recommendation 15 of the FATF Standards to ensure that stablecoin issuers, intermediary VASPs, financial institutions, and other relevant participants in stablecoin arrangements are subject to clear AML/CFT obligations. The report also highlights good practices which jurisdictions and the private sector may adopt to mitigate the misuse of stablecoins. These include:
- Requiring stablecoin issuers to implement risk-based technical and governance controls, such as the ability to freeze, burn, or withdraw stablecoins in the secondary market, conduct customer due diligence at the redemption stage, and, where appropriate, restrict transactions to pre-approved addresses and block transactions involving high-risk addresses.
- Developing technical knowledge within supervisory and law enforcement authorities, including, for example, expertise in cross-chain transaction mechanics and blockchain analytical tools.
- Ensuring that competent authorities have the tools and legal frameworks necessary for both domestic and international cooperation; and
- Establishing public–private partnerships to enhance cooperation.
Lastly, the report also refers to case studies showing how new technologies and blockchain analytical tools have been used to detect and disrupt the misuse of stablecoins.
Interested parties may access the publication directly from the FATF’s website or from the FIAU’s website under the tab “FATF”.