FATF 2025: Virtual Asset Money Laundering Risks Demand Tougher Action

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Money laundering through virtual assets has become a pressing concern for financial crime professionals, regulators, and policymakers worldwide. The Financial Action Task Force’s (FATF) sixth targeted update published in June 2025 signals a pivotal moment for both global and domestic approaches to anti-money laundering (AML) compliance in the rapidly evolving world of virtual assets and virtual asset service providers. As criminal actors increasingly exploit the borderless nature of cryptocurrencies, stablecoins, and decentralized finance (DeFi), the FATF’s findings point to both progress and alarming gaps. This article unpacks the current state of compliance, the main vulnerabilities identified, and the steps that must be taken to limit systemic illicit finance risks.

Money Laundering Risks in Virtual Assets

Virtual assets—encompassing cryptocurrencies, stablecoins, and tokenized assets—have swiftly moved into the financial mainstream, presenting new AML challenges. The FATF update draws attention to the fact that, despite incremental progress since 2019, significant loopholes remain. Global illicit finance flows increasingly use virtual assets to evade detection, launder proceeds from crime, and move funds across borders with minimal friction.

A core concern for regulators is the anonymous and instantaneous transfer of value across jurisdictions. While the FATF’s Recommendation 15 and its interpretative guidance, updated in 2019, made the application of AML/CFT obligations to virtual assets explicit, many countries are still behind on fully implementing and enforcing these standards. The FATF update finds that although 99 jurisdictions are now adopting legislation to implement the so-called “Travel Rule”—which requires sharing identifying information with every cross-border crypto transaction—actual supervision, enforcement, and compliance are lagging.

Emerging typologies underline the breadth of the risk. Sophisticated cybercriminals, sanctioned actors, drug trafficking organizations, and terrorist financiers all leverage virtual assets. The latest trend has seen the widespread use of stablecoins for cross-border illicit activity, with these digital tokens now representing the bulk of on-chain illegal finance. These vulnerabilities, if unaddressed, risk undermining broader AML/CFT frameworks and may facilitate new forms of organized crime.

Regulatory Gaps and Compliance Challenges

While many jurisdictions are making progress toward regulating virtual asset service providers (VASPs), FATF’s 2025 review makes clear that enforcement and supervision are often inconsistent or incomplete. Regulatory arbitrage remains a significant issue. Some VASPs relocate to jurisdictions with weaker AML oversight or operate offshore entirely, putting the integrity of the global financial system at risk.

One of the key barriers is the difficulty in identifying the natural or legal persons behind VASP activity. Pseudonymity and layered transactions in decentralized finance ecosystems can obscure ultimate beneficial ownership, complicating customer due diligence and ongoing monitoring obligations. Many jurisdictions have reported difficulties in ensuring effective oversight of offshore VASPs and, despite the introduction of licensing and registration requirements, supervisory capacity has not always kept pace with the complexity and scale of the sector.

Asset recovery remains another challenge. Criminal organizations and state-sponsored actors, such as those linked to the Democratic People’s Republic of Korea (DPRK), have managed to execute large-scale thefts—most notably the $1.46 billion hack targeting the ByBit exchange—while law enforcement agencies have recovered only a tiny fraction of stolen funds. These cases highlight deficiencies in cross-border cooperation, tracing, freezing, and confiscation of virtual assets.

The FATF update also notes that many public and private sector actors struggle to implement risk-based approaches. For example, risk assessments often do not adequately capture the rapidly shifting typologies of virtual asset misuse. Meanwhile, technological advances such as non-custodial wallets, decentralized exchanges, and privacy-enhancing technologies outpace regulatory and supervisory adaptation, creating blind spots that criminals readily exploit.

The Growing Threat of Professionalized Fraud and Scams

A striking theme in the FATF’s latest findings is the industrialization of fraud and scam networks using virtual assets. The year 2024 saw an estimated $51 billion in on-chain illicit activity attributed to fraud and scams alone. The digital environment has enabled criminal groups to scale up operations, with phishing schemes, ransomware, investment fraud, and social engineering tactics generating unprecedented proceeds.

Law enforcement operations, such as the United Kingdom’s Operation Destabilise, have exposed the intricate networks behind these scams. These cases reinforce the necessity for rapid, coordinated international responses, but also reveal systemic weaknesses. The ability to freeze and seize digital assets before they are dissipated remains limited, particularly when funds are quickly transferred through a series of anonymous wallets across multiple jurisdictions.

Stablecoins, which are pegged to fiat currencies and often promoted as lower-risk alternatives, are now the preferred vehicle for many illicit actors. They offer a convenient, liquid means to move and store value. Without robust, harmonized global regulation, the widespread adoption of stablecoins could amplify the scale of money laundering and terrorist financing risks.

Furthermore, the professionalization of scams has made detection harder. Criminal enterprises now invest in sophisticated laundering techniques, exploit vulnerabilities in onboarding processes, and actively seek jurisdictions with weak AML controls. The convergence of these factors means that even with regulatory advances, law enforcement and compliance teams must remain vigilant and agile to detect and disrupt evolving money laundering methods.

International Cooperation and Supervisory Best Practices

A central message from the FATF’s 2025 review is that the battle against virtual asset money laundering requires consistent international cooperation and the adoption of best practices at all levels. The FATF has released a new set of supervisory best practices, aiming to help regulators and supervisors close persistent gaps.

The Travel Rule remains the cornerstone of information-sharing between VASPs and across borders. However, many countries still face technical, legal, and operational barriers to full implementation. Effective enforcement of the Travel Rule means that not only must data be transmitted with every qualifying transaction, but that VASPs must also have systems in place to screen for sanctioned individuals and suspicious behavior in real time. Supervisors need the skills and resources to audit compliance, investigate non-compliance, and sanction firms that fall short.

The update also emphasizes the need for better cross-border asset recovery frameworks. The swift movement of digital assets can stymie traditional asset tracing and freezing efforts. Jurisdictions must strengthen mechanisms for timely exchange of information, mutual legal assistance, and coordinated freezing and confiscation actions.

Public-private partnerships play a critical role. The FATF highlights that technology providers—such as Chainalysis, Lukka Inc, Merkle Science, and TRM Labs—are now essential partners in both detection and investigation. Collaborative projects and joint investigations, including data analytics and typology sharing, are increasingly vital to tackling the rapid evolution of financial crime in the virtual asset ecosystem.

Conclusion: The Path Forward for AML in Virtual Assets

The FATF’s 2025 targeted update is a call to action for all jurisdictions and industry participants involved with virtual assets. While substantial progress has been made, the global AML regime remains exposed to significant money laundering risks stemming from gaps in supervision, enforcement, and international cooperation. Rapid innovation in virtual assets continues to outpace regulation, giving criminals a head start in exploiting weaknesses for illicit gain.

Jurisdictions must double down on efforts to identify and supervise all VASPs, implement the Travel Rule effectively, and improve asset recovery and cross-border collaboration. Industry actors must stay ahead of evolving threats by investing in technology, enhancing due diligence, and fostering a culture of compliance that adapts to new risks as they emerge.

Money laundering through virtual assets is a dynamic, borderless threat. Addressing it will require a united, persistent response—combining regulatory vigilance, technological innovation, and global cooperation. Only by closing existing gaps and staying alert to new typologies can the financial sector hope to safeguard integrity in an increasingly digital world.

Source: FATF

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