Banking and Finance Law Daily Wrap Up, FINANCIAL TECHNOLOGY—FATF report details vulnerabilities surrounding stablecoins and unhosted wallets, (Mar 13, 2026)

By Patricia K. Ruiz, J.D.

The international watchdog highlights expanding illicit finance risks and outlines regulatory and supervisory practices adopted across multiple jurisdictions.

The Financial Action Task Force (FATF) has released a comprehensive report detailing emerging money laundering, terrorist financing, and proliferation financing risks associated with stablecoins and unhosted wallets, with a particular focus on peer-to-peer (P2P) transactions. Covering developments through the end of 2025, the report underscores rapid growth in the stablecoin market, evolving misuse by threat actors, and gaps in regulatory and supervisory frameworks across jurisdictions.

Vulnerabilities created by stablecoins. According to FATF, more than 250 stablecoins were in circulation as of mid ;2025, with market capitalization exceeding USD 300 billion and daily trading volumes surpassing those of Bitcoin. Fiat ;backed stablecoins accounted for the vast majority of activity, and nearly 90% of stablecoins were centrally governed. While stablecoins offer faster settlement times, lower fees, and cross;border utility, the report notes that these same features create vulnerabilities in anti-money laundering/countering the financing of terrorism/counter proliferation financing (AML/CFT/CPF) regimes, particularly as adoption increases.

The report highlights that stablecoins have become the most commonly used virtual assets in illicit transactions, with widespread use observed in money laundering, terrorist financing, and proliferation financing schemes. Threat actors frequently leverage unhosted wallets, unlicensed or unregistered virtual asset service providers, mixers, and cross ;chain tools to obscure fund flows. P2P transfers conducted through unhosted wallets were identified as a “key vulnerability,” falling outside formal AML/CFT obligations and complicating detection and reporting.

FATF outlines vulnerabilities throughout the stablecoin lifecycle—issuance, circulation, and redemption—including multi ;jurisdictional issuance structures, inconsistent compliance among intermediary virtual asset service providers (VASPs), and redemption pathways that bypass regulated channels. Cross ;chain interoperability further complicates oversight, as stablecoins circulate across multiple blockchain networks, reducing the effectiveness of freeze or deny ;listing mechanisms.

Recommendations. To address these concerns, the report details a range of good practices adopted across jurisdictions. These include applying clear AML/CFT obligations to issuers and intermediaries, embedding programmable controls such as allow ;listing, deny ;listing, and freeze functions in smart contracts, and leveraging blockchain analytics for both public ; and private ;sector monitoring. Several jurisdictions’ approaches—such as Japan, Switzerland, France, Singapore, Hong Kong, and the EU—are cited as examples of regulatory, technical, and supervisory measures designed to mitigate misuse.

FATF also emphasizes the need for enhanced collaboration, recommending the establishment of supervisory colleges for cross ;border stablecoin arrangements, stronger public ;private information ;sharing mechanisms, and expanded technical capacity for regulators and law enforcement. The report concludes with recommended actions for jurisdictions and private ;sector entities, including proactive monitoring of stablecoin activity in secondary markets, structured risk mitigation measures for unhosted wallet transactions, and expanded use of analytics and smart ;contract ;based controls.

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