A new report from the Financial Action Task Force (FATF) warns that stablecoins are increasingly being exploited for money laundering and other illicit finance activities, with peer-to-peer transfers through unhosted wallets emerging as a key vulnerability in the global crypto ecosystem.

The FATF’s report on Tuesday shed light on how a rapid growth of stablecoins has introduced new anti-money laundering (AML) risks that regulators and financial institutions are struggling to address.

The report notes that more than 250 stablecoins were in circulation by mid-2025, with a combined market capitalization exceeding $300 billion.

Blockchain analytics data cited in the report shows that stablecoins accounted for 84% of illicit virtual asset transaction volume in 2025, often involving complex laundering techniques designed to obscure the origin of funds.

Stablecoins Emerging As Preferred Tool For Illicit Finance

The FATF report states that the characteristics that make stablecoins attractive for legitimate payments, like price stability, liquidity, and cross-chain interoperability, also make them appealing for criminal misuse.

Authorities have observed stablecoins being used by money launderers, terrorist financiers and state-linked cybercriminal groups to move and conceal illicit proceeds.

The report specifically notes that actors linked to North Korea have adopted stablecoins as a preferred method for laundering funds generated through ransomware, phishing and other cyber-enabled crimes.

Iranian actors have also been observed using stablecoins in activities linked to proliferation financing.

The risks are amplified by the ability to conduct peer-to-peer transactions through unhosted wallets, which allow transfers to occur directly between individuals or entities without the involvement of regulated intermediaries such as Virtual Asset Service Providers (VASPs) or financial institutions.

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Unhosted Wallets And Cross-Chain Activity Create Oversight Gaps

The FATF warns that transactions conducted through unhosted wallets can bypass traditional AML monitoring mechanisms because they do not necessarily pass through regulated platforms.

These peer-to-peer transfers can also involve cross-chain activity, making oversight more difficult for stablecoin issuers and regulators.

According to the report, stablecoin issuers may face challenges controlling transactions that occur outside their immediate network or across multiple blockchain ecosystems, potentially placing some activities outside existing counter-illicit finance frameworks.

The organization said that only a limited number of jurisdictions have developed regulatory frameworks specifically tailored to stablecoin ecosystems, despite the rapid expansion of these assets in global financial markets.

FATF Calls For Stronger Controls And Regulatory Oversight

The FATF is urging governments and industry participants to strengthen AML controls across the stablecoin ecosystem and fully implement Recommendation 15 of its global standards.

Under these recommendations, stablecoin issuers, intermediary VASPs and financial institutions involved in stablecoin arrangements should be subject to clear anti-money laundering and counter-terrorism financing obligations.

The report also outlines several measures that regulators and private sector participants could adopt to mitigate risks.

These include requiring stablecoin issuers to implement technical controls such as freezing or burning tokens in secondary markets, conducting customer due diligence at redemption, and using smart-contract mechanisms such as allow-lists and deny-lists to restrict high-risk transactions.

The FATF further recommends that supervisory authorities develop stronger technical capabilities to monitor cross-chain activity and peer-to-peer transfers, including the use of blockchain analytics tools and expertise in smart contract functionality.

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