TL;DR
- The 84% reality: Stablecoins now account for the vast majority of illicit crypto transaction volume. This shift — aligned with increased stablecoin adoption overall — has moved stablecoin-specific compliance to a top-tier regulatory priority.
- The “secondary market” era: Regulatory expectations are moving beyond on-ramps. The FATF now encourages the proactive monitoring of the entire stablecoin lifecycle, including P2P transactions via personal wallets, a shift that is already leading issuers to use on-chain data as the basis for directly freezing illicit assets.
- Closing the visibility gap: Advanced analytics provide the transparency needed to manage risks around personal wallets. This allows issuers and VASPs to automate “multi-hop” analysis across multiple prior transactions, and block sanctioned and other high-risk addresses from transacting in the secondary market.
The Financial Action Task Force (FATF) recently published its Targeted Report on Stablecoins and Unhosted Wallets (March 2026). The report highlights that, while stablecoins have grown rapidly in scale and functional integration within the traditional financial system, their price stability and high liquidity have also made them a preferred tool for illicit actors.
A significant takeaway from the report, based on our latest findings, is the scale of this shift: by 2025, stablecoins accounted for 84% of all illicit virtual asset transaction volume. As a result, the FATF is increasingly focusing on the risks associated with “secondary market” activity, particularly peer-to-peer (P2P) transactions via unhosted wallets outside of regulated intermediaries. While the ability to hold and transfer stablecoins directly is a core feature of blockchain technology, the FATF emphasizes that this same autonomy creates a “visibility gap” that requires new approaches to risk mitigation.
The regulatory focus on the secondary market
The FATF identifies P2P stablecoin transactions as a key vulnerability because they fall outside the immediate scope of traditional virtual asset service provider (VASP) recommendations. When transactions occur between self-hosted wallets without an AML/CFT-obliged intermediary, jurisdictions face significant challenges in obtaining KYC information; furthermore, in these P2P instances, there is typically no single entity responsible for monitoring or reporting suspicious activity.
The FAFT’s report marks the beginning of a pivotal shift in regulatory expectations: moving from a primary focus on “on-and-off ramps” (where crypto-assets are exchanged for fiat currency) to the proactive monitoring of the secondary market.
Specifically, the FATF suggests that jurisdictions should consider how existing AML/CFT/CPF obligations could apply in secondary markets, including leveraging the unique “programmable” nature of stablecoins. Paragraphs 62 and 64 of the report suggest that:
- jurisdictions should consider requiring issuers to maintain the technical capability to execute functions such as “burn” and “freeze,” stablecoins in the secondary market;
- and stablecoin issuers may be required to proactively monitor the location and usage of their assets in the secondary market using blockchain analytics tools.
This reflects an emerging regulatory trend. For example, Switzerland’s recent proposals suggest that secondary market observations are becoming an expected component of an issuer’s AML obligations due to the increasing technical capabilities of blockchain analytics.
Implications for stakeholders
The shift toward secondary market monitoring requires a more integrated approach to compliance. By viewing the stablecoin lifecycle as a continuous process rather than isolated events, law enforcement, VASPs, and issuers can more effectively identify and mitigate risks as they move across the ecosystem.
1. Jurisdictions and law enforcement
The FATF encourages jurisdictions to ensure the efficient use of tracing tools to identify exit points and off-ramps. However, the report also emphasizes using more off-chain data and investigation methods to enrich on-chain intelligence.
The FATF acknowledges that, when illicit activity is detected in the secondary market, authorities may directly engage the stablecoin issuer to utilize smart contract functions (e.g., freezing assets) to mitigate risk.
2. Virtual Asset Service Providers (VASPs)
The report recommends that VASPs and Financial Institutions apply robust AML/CFT measures across the entire lifecycle of a stablecoin: issuance, circulation, and redemption.
- Counterparty risk: VASPs are encouraged to use blockchain analytics to determine the risk level of customers’ counterparties who use unhosted wallets.
- “Multiple hops” analysis: Explicitly, the FATF suggests that VASPs look multiple “hops” back in a transaction’s history to understand the broader AML/CFT risk associated with a specific transfer.
- Risk-based approach vs. hard caps: The FATF highlights that some entities may apply maximum transaction sizes for unhosted wallet transfers to mitigate risk. We believe that a calibrated, risk-based transaction monitoring system is often more efficient than arbitrary hard caps, as it provides forensic insight without unnecessarily restricting legitimate activity.
3. Stablecoin issuers
Issuers are increasingly viewed as central to risk mitigation and to taking swift action against sophisticated organized crime. The FATF encourages:
- Technical design and governance: Implementing programmable measures such as allow-listing (white-listing) or deny-listing (black-listing) within a stablecoin’s smart contract to prevent high-risk addresses, such as sanctioned wallets, from transacting in the secondary market.
- Comprehensive risk assessment: Issuers should be required to assess and mitigate ML/TF/PF risks associated not only with their primary customers (those minting and redeeming from the issuer directly), but also with the wider circulation of the asset. This includes leveraging blockchain analytics to identify systemic trends and potential misuse patterns across the entire stablecoin ecosystem; and, where appropriate, act on that intelligence.
How Chainalysis can support
The FATF report explicitly recognizes the utility of blockchain analytics and encourages both the public and private sectors to strengthen their technical expertise in these tools. Modern data solutions, such as Chainalysis KYT and Data Solutions, enable the secondary market observation described in the report.
- For law enforcement: Analytics are essential for tracing stablecoin flows across multiple blockchains to identify high-risk exit points and off-ramps. By pairing on-chain data with investigative tools, authorities can uncover sophisticated layering schemes and obtain the necessary evidence to request that issuers (or VASPs where assets are held) freeze or restrict illicit assets in the secondary market, regardless of where or by whom they have been exchanged.
- For issuers: Analytics allow for a holistic view of an asset’s ecosystem, providing the intelligence needed to trigger smart contract mitigations (like freezing assets) in real-time.
- For VASPs: While tools like KYT automate the process of looking “multiple hops” back — identifying exposure to illicit clusters without manual overhead — Sentinel provides real-time insight into an asset’s risk profile to ensure holders in their ecosystem remain within predefined risk thresholds.
- For supervisors: Real-time data allows for an ongoing understanding of an entity’s or an asset’s risk exposure, including concentration of holders, wallet balances, and transaction flows, alongside illicit usage trends. These tools can be used to benchmark entities and assets, identifying anomalous behavior through real-time alerts. This is vital for supervisors to discharge their functions more efficiently in a digital, blockchain-enabled, financial services world.
While this FATF report is non-binding, it serves as a foundational document that will shape the expectations of AML supervisors globally. The report clarifies that the technical tools to monitor secondary markets now exist, and their adoption is rapidly becoming a regulatory baseline. For stablecoin issuers and VASPs, the challenge is now ensuring that compliance frameworks are sophisticated enough to monitor the entire lifecycle of an asset.
To learn more about how Chainalysis supports stablecoin issuers and VASPs in meeting these evolving standards, get in touch with our team here.
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