In its latest review of the implementation of standards for virtual assets and virtual asset service providers (VASPs), the Paris-based body said progress in regulating the sector remained uneven, creating vulnerabilities that organised crime groups, terrorist financiers and sanctioned entities continue to exploit.

The watchdog said stablecoins have become the preferred vehicle for a growing share of illicit crypto transactions because of their widespread adoption and cross-border reach, underscoring the need for regulators to accelerate implementation of anti-money laundering (AML) and counter-terrorism financing (CTF) measures.

FATF called on jurisdictions to fully implement its standards for virtual assets, including licensing or registering crypto service providers, strengthening supervision and enforcing the “Travel Rule,” which requires firms facilitating digital asset transfers to collect and share information on the originators and beneficiaries of transactions.

The organisation said many countries have made progress in developing regulatory frameworks, but implementation remains inconsistent, allowing criminals to exploit jurisdictions with weaker oversight.

“With virtual assets inherently borderless, regulatory failures in one jurisdiction can have global consequences,” the watchdog said.

The report highlighted continued difficulties in identifying the individuals behind many virtual asset transactions and warned that inadequate international cooperation could undermine efforts to combat financial crime.

It urged authorities to improve information sharing across borders and enhance supervision of crypto-related businesses.

The warning comes as governments worldwide seek to strike a balance between encouraging innovation in digital assets and protecting financial systems from abuse.

The rapid growth of cryptocurrencies and stablecoins has prompted regulators to tighten oversight amid concerns over money laundering, sanctions evasion and terrorist financing.

FATF develops global standards for combating money laundering, terrorist financing and proliferation financing, with its recommendations serving as the benchmark for national regulatory frameworks governing financial institutions and virtual asset service providers.

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