Global Watchdog Urges Tighter Crypto Oversight as Illicit Risks Mount

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The Financial Action Task Force (FATF), the world’s leading financial crime watchdog, has issued a stark warning: without urgent regulatory action, crypto assets could pose serious risks to the global financial system. In a statement released Thursday from its Paris headquarters, FATF called on countries to strengthen efforts to combat illicit finance in the rapidly growing digital asset space.

FATF highlighted that despite improvements in regulation since 2024, many jurisdictions remain vulnerable. “With virtual assets inherently borderless, regulatory failures in one jurisdiction can have global consequences,” FATF said. This warning underscores the challenges posed by cryptocurrencies’ decentralised nature, which allows funds to move across borders with ease and, increasingly, with opacity.

Compliance Progress Remains Uneven

According to FATF’s latest assessment, only 40 of 138 jurisdictions evaluated by April 2025 were “largely compliant” with its standards on virtual assets. Although this marks an improvement from 32 compliant jurisdictions a year earlier, FATF emphasised that progress has been too slow given the pace of innovation and the rising use of cryptocurrencies in illicit activities.

The Paris-based body’s call to action comes as financial authorities worldwide grapple with how to regulate crypto markets without stifling technological innovation. The stakes are high: Chainalysis, a blockchain analytics firm, estimated that illicit crypto wallet addresses received up to $51 billion in 2024 alone, highlighting how digital assets are becoming a preferred vehicle for financial crime.

Stablecoins in the Crosshairs

One of the FATF’s key concerns centres on stablecoin cryptocurrencies pegged to traditional fiat currencies, which it said are increasingly used by illicit actors. “Most illicit crypto activity now involves stablecoins,” FATF warned. The watchdog noted that groups including North Korea, terrorist financiers, and drug traffickers are exploiting stablecoins’ convenience and relative price stability to move and hide illicit funds.

FATF’s report specifically referenced North Korea’s recent activities. In February, the FBI identified the North Korean regime as responsible for the theft of approximately $1.5 billion worth of virtual assets from crypto exchange ByBit, the largest recorded crypto heist to date. North Korea has consistently denied involvement in hacking or crypto thefts, but experts say the country has turned to cybercrime as a means of funding its sanctioned weapons programmes.

Global Financial Stability at Stake

The FATF’s warning follows growing concerns from other financial regulators. In April, the European Union’s securities watchdog cautioned that the deepening links between the crypto sector and traditional financial markets could create systemic risks. The watchdog argued that as institutional investors expand into crypto, shocks in the digital asset markets could increasingly spill over into mainstream financial systems, potentially endangering broader economic stability.

One of the most pressing challenges regulators face is the difficulty of tracing the true identities behind virtual asset transactions. Unlike traditional bank transfers, many cryptocurrency transactions are pseudonymous, and the proliferation of decentralised exchanges makes it easier than ever for illicit actors to move money without detection. FATF’s report stressed that countries must develop stronger tools and international cooperation mechanisms to “identify who is behind virtual asset transactions” and to “track and freeze assets tied to criminal activities.”

Urgent Call for Coordinated Action

In its statement, FATF made clear that addressing the risks posed by virtual assets cannot be accomplished by individual countries acting alone. Because crypto transactions are borderless by design, weak regulatory frameworks in even a single jurisdiction can provide safe havens for criminals, undermining global efforts to fight money laundering, terrorist financing, and other financial crimes.

FATF urged all member states to fully implement its standards on virtual assets and to share intelligence and best practices. The watchdog also called for closer collaboration between regulators, law enforcement agencies, and the crypto industry itself to develop new technological solutions for monitoring and investigating suspicious activity.

A Race Against Time

As crypto adoption accelerates and technological innovation continues at a breakneck pace, FATF’s report serves as a reminder of the urgent need to close regulatory gaps. Without decisive action, illicit finance in the crypto sector threatens not only individual investors but also the stability of global financial systems.

“Regulatory failures in one jurisdiction can have global consequences,” FATF reiterated, signalling that the window to address crypto’s regulatory blind spots is rapidly closing. The coming months will test whether international cooperation can keep pace with the evolving world of digital finance or whether criminals will continue to exploit its vulnerabilities unchecked.

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