Stablecoins face scrutiny as FATF report flags illicit use

FATF stablecoin report: Stablecoins dominate 2025 illicit crypto activity

According to the Financial Action Task Force (FATF), stablecoins are now the most used virtual asset in illicit transactions, accounting for 84% of 2025’s detected on-chain illicit volume. The targeted report highlights misuse particularly through peer‑to‑peer activity involving unhosted wallets.

As reported by CoinDesk, the 84% share corresponds to about $154 billion of illicit crypto transaction volume in 2025 and is prompting calls for tighter oversight. The figures refer to identified on‑chain movements and do not imply that most stablecoin activity is illicit.

Why stablecoins are misused and immediate oversight actions

Several structural features explain the shift. High liquidity, relative price stability, and always‑on cross‑border transferability make stablecoins efficient for both legitimate settlement and criminal cash‑outs, while peer‑to‑peer transfers and unhosted wallets can bypass intermediary controls.

Independent analytics also find a dominant stablecoin share for illicit flows, though estimates vary by methodology and what is counted as illicit. “Stablecoins are the dominant form of crypto asset for transacting value as well as for undertaking illicit activity,” said Jordan Wain, Policy Adviser at Chainalysis.

Institutional risk observers have warned that integrity safeguards can be weaker in certain crypto flows than on traditional rails. “Stablecoins have been the go‑to choice for illicit use to bypass integrity safeguards,” said the Bank for International Settlements (BIS).

Near‑term supervisory priorities include stricter application of existing AML standards, closing peer‑to‑peer blind spots, and hardening controls at issuance and redemption touchpoints. Estimates in different studies measure detected on‑chain activity, so percentages should be read alongside methodology notes rather than as a measure of total off‑chain crime.

Compliance implications: deny-lists, Travel Rule, unhosted wallets

According to AML Intelligence, countries are being urged to compel stablecoin firms to maintain deny‑lists, enabling issuers and intermediaries to block known illicit addresses. In parallel, Travel Rule obligations require regulated virtual asset service providers to exchange sender and recipient information; transfers to unhosted wallets present residual gaps that firms mitigate with risk‑based controls.

Unhosted wallets are self‑custody addresses controlled by individuals rather than custodians. When both ends of a transfer are unhosted, Travel Rule data are not exchanged, so regulators focus on on‑ and off‑ramps, counterparty due diligence, and abnormal behavior detection.

Issuer and exchange checklist: screening, analytics, freezes, recordkeeping

Issuers and exchanges should align controls around four pillars: screening counterparties and assets for sanctions, fraud, and exposure; applying on‑ and cross‑chain analytics to detect obfuscation and layering; maintaining documented freeze and escalation workflows; and preserving records sufficient for audits and law‑enforcement requests.

Complementary measures include Travel Rule interoperability, customer risk scoring, case management with evidentiary chains, and governance that assigns accountable owners for sanctions and AML outcomes. Controls should extend to cross‑chain bridges, mixers, and high‑risk jurisdictions based on consistent risk assessments.

Traceability and freezing: centralized versus decentralized stablecoins

Stablecoin traces on public ledgers can support investigations when paired with analytics and high‑quality off‑chain data. Centralized models typically include issuer‑level controls that can freeze tokens and blacklist addresses under policy, while decentralized designs without administrative keys rely on VASP‑level controls and, where applicable, custodial freezes.

In practice, recoveries and interdictions hinge on whether assets touch a regulated intermediary. When they do, Travel Rule data, sanctions screening, and case escalation can enable freezes or seizures; when they do not, analysis focuses on transaction patterns, counterparties, and eventual off‑ramp attempts.