Stablecoins pose a money laundering and terrorist financing risk to the world, the Financial Action Task Force (FATF) said Friday.

In documents released after its latest meeting, the intergovernmental organization referred to cryptocurrencies as a “major strategic initiative,” and said cryptos whose values are pegged to fiat currencies could have a particularly big impact.

Some 800 representatives from 205 jurisdictions met from Oct. 16 to Oct. 18 to discuss various issues under the jurisdiction of FATF, led this year by Xiangmin Liu of China, according to the publication. Crypto-related concerns were front and center.

While the document addressed cryptocurrencies broadly, it singled out stablecoins on multiple occasions, writing:

“Emerging assets such as so-called global ‘stablecoins’, and their proposed global networks and platforms, could potentially cause a shift in the virtual asset ecosystem and have implications for the money laundering and terrorist financing risks. There are two concerns: mass-market adoption of virtual assets and person-to-person transfers, without the need for a regulated intermediary. Together these changes could have serious consequences for our ability to detect and prevent money laundering and terrorist financing.”

A second document, titled “Money laundering risks from ‘stablecoins’ and other emerging assets,” said the FATF will continue to examine the characteristics and perceived risks of stablecoins and may even clarify or update its virtual currency guidance to better address this class of cryptocurrency.

“The FATF will continue to ensure its standards remain relevant and responsive and it will report to G20 Finance Ministers and Central Bank Governors in 2020 on the risks from global ‘stablecoins’ and other emerging assets,” the second document read.

The FATF’s warning followed a report from the Group of Seven (G7) advanced economies and the and Bank of International Settlements (BIS) calling stablecoins a growing threat to monetary policy, financial stability and competition.

Report cards

During its session, the FATF determined how it would evaluate countries’ implementation of its last guidance on digital assets and will add this process to its current mutual evaluation procedure.

In June, FATF called on national financial services and banking regulators to implement a strict know-your-client/anti-money-laundering regime, going so far as to require exchanges and wallet providers, dubbed virtual asset service providers (VASPs), to hold KYC information for recipients of transactions originating on their platforms.

“Countries that have already undergone their mutual evaluation will be required to report back during their follow-up process on the actions they have taken in this area,” Friday’s document said.

The document made it clear that FATF member countries are required to implement its standards for digital assets, as well as other emerging asset classes.

“Given the global nature of virtual assets, it is essential that countries implement these requirements swiftly, in particular understanding the risks and ensuring the effective supervision of the sector,” one document read.

Digital identity

In addition to its concerns about stablecoins, the FATF discussed the increasing importance of digital identity in payment systems, according to the document.

“In recent years, there has been a significant shift towards digital payments. The number of transactions [is] growing at over 12 percent every year,” the document read. “Customer identification is essential to prevent criminals and terrorists from raising and moving funds. However, in the growing digital world, different customer identification methods exist.”

As a result, the FATF plans to release draft guidance on digital identity for public comment. While the section did not discuss blockchain-based digital identity tools, a number of companies in the crypto industry are looking to create secure digital identity systems.

The guidance focuses on a “risk-based approach to using digital ID systems,” the document says, citing due diligence requirements as one issue. It concluded:

“The FATF supports financial innovation that does not create new safe havens for terrorists and criminals to carry out their transactions. Responsible innovation in the form of reliable digital ID systems contributes to the objectives of preventing its misuse for crime and terrorism, and supporting financial inclusion.”

Money laundering image via Shutterstock