FATF to Countries: Tighten Oversight on Virtual Assets

• Says criminals increasingly using stablecoins to move illicit funds

Global anti-money laundering (AML), anti- terrorist financing watchdog, Financial Action Task Force (FATF), has urged governments across the world to tighten oversight of the digital asset sector, warning that criminals are increasingly using stablecoins to move illicit funds.

The warning was contained in the global regulator’s just-released seventh annual Targeted Update on Implementation of the FATF Standards on Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs), which centred on jurisdictional compliance with FATF Recommendation 15 (R.15).

R.15 was amended in 2019 to extend anti-money laundering (AML) and counter-terrorist financing (CFT) obligations to VAs and VASPs.

It called for greater international progress on regulatory, licensing, and registration regimes, as criminal groups increasingly capitalised on regulatory gaps to funnel billions in illicit proceeds through the virtual asset sector.

FATF’s call came on the heels of the recent Article IV Consultation report of the International Monetary Fund (IMF) on Nigeria, which stated that the country accounted for about 60 per cent of stablecoin inflows into sub-Saharan Africa.

Although IMF acknowledged that the digital assets lowered cross-border transaction costs, it warned that their rapid adoption threatened the naira’s sovereignty and risked triggering “digital dollarisation”.

IMF prescribed bringing stablecoins and other virtual asset activities within the established regulatory framework, aligning domestic rules with emerging international standards.

To counter digital dollarisation, IMF advised Nigerian authorities to maintain a credible and stable domestic currency, pointing out that recent macroeconomic reforms and tighter monetary policy have started to restore confidence in the naira.

The multilateral lender further recommended clarifying the treatment of stablecoin issuers and formalising rules through entities like Securities and Exchange Commission (SEC) and Central Bank of Nigeria (CBN).

It stressed the need for better monitoring of crypto-asset transactions and blockchain flows to mitigate risks, like money laundering and illicit financing.

While raising the latest global alarm on digital assets, FATF said most identified criminal activities now involved dollar-backed stablecoins and warned that gaps in regulation continued to create opportunities for illicit finance.

It stated that some criminal networks had gone a step further by creating their own stablecoins designed to make it harder for authorities to freeze or seize assets, adding that inconsistent regulation, offshore virtual asset service providers, and uneven enforcement across jurisdictions continue to create opportunities for illicit finance.

The FATF annual review assessed how countries were implementing anti-money laundering standards for cryptocurrencies. It found that while 83 per cent of surveyed jurisdictions had incorporated the Travel Rule into their legal frameworks, enforcement remained uneven, particularly for cross-border crypto transactions.

The Travel Rule requires financial institutions and virtual asset service providers to collect and share information about the sender and recipient of qualifying transactions.

Regulators consider it a key measure for detecting and preventing money laundering and terrorist financing.

According to the report, only 99 jurisdictions have either implemented the Travel Rule or are actively working towards adopting it, leaving regulatory gaps that criminals can exploit.

The watchdog also urged stablecoin issuers to tighten their risk controls. It recommended that stablecoin issuers have the capability to freeze or permanently remove tokens linked to wallets identified by authorities as suspicious.

FATF said many stablecoin issuers had followed different standards, stressing that some jurisdictions do not require issuers to cooperate closely with investigations.