FATF targeted report on stablecoins and unhosted wallets

The Financial Action Task Force (FATF) has issued a targeted report setting out the money laundering (ML), terrorist financing (TF) and proliferation financing (PF) risks and vulnerabilities related to stablecoins and unhosted wallets, particularly during peer-to-peer (P2P) transactions. In addition, the report identifies and shares a range of good practices that could be implemented by jurisdictions and the private sector to mitigate these risks and makes recommendations for implementation.

The report highlights that only a limited number of jurisdictions have implemented targeted regulatory frameworks for entities operating within the stablecoins ecosystem, explicitly taking into account the features that distinguish stablecoins from other virtual assets. While the FATF Standards do not require jurisdictions to adopt regulatory frameworks for stablecoin arrangements beyond those already applicable to virtual asset service providers, the FATF urges countries to recognise the specific ML/TF/PF risks associated with stablecoins and to implement proportionate and effective mitigating measures that reflect their distinct characteristics.

FATF recommends that jurisdictions should apply Recommendation 15 to all relevant entities involved in stablecoin arrangements, ensuring that they are subject to clear, enforceable ML/TF obligations. Jurisdictions should also define the roles and responsibilities of all participants throughout the stablecoin ecosystem and impose appropriate ML/TF obligations using a risk-based approach.

Other key good practices and recommendations include:

• Requiring stablecoin issuers to adopt 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 redemption and, where appropriate, implement smart contract controls, such as allowlisting (restricting transactions to pre-approved addresses) and denylisting (blocking transactions involving high-risk addresses).
• Developing strong technical capabilities within supervisory and law enforcement authorities, including expertise in smart contract functionalities, cross-chain transaction mechanics, blockchain analytics tools and monitoring risks from P2P transactions via unhosted wallets.
• Ensuring competent authorities have the tools and legal frameworks necessary for swift domestic and international cooperation that enable rapid information exchange, particularly in cases involving freezing or burning of stablecoins.
• Establishing public private partnerships to strengthen cooperation on typologies, risk indicators and emerging threats, as well as more tactical partnerships for investigations.

Return to main website.