An exclusive article by Adeel Khamisa
Stablecoins have moved from being a niche crypto experiment to something much closer to a global payment infrastructure. They sit at the intersection of finance, payments, and the open internet. Regulators now see them not just as speculative assets but as instruments that could carry large volumes of cross-border payments.
That shift explains why the Financial Action Task Force (FATF) recently issued a targeted report looking at stablecoins and unhosted wallets. The report focuses on one core concern. Stablecoins are becoming easier to move outside the traditional financial system while still maintaining the economic properties of fiat currency. From an anti-money-laundering perspective, that creates obvious challenges.
At roughly the same time, Canada proposed a federal stablecoin regulatory framework through Budget 2025 legislation. The proposal is often referred to as Canada’s Stablecoin Act. Its goal is to bring stablecoin issuers under a clear prudential regime and give the Bank of Canada oversight over the sector.
When you place the FATF recommendations beside Canada’s proposal, a clear picture emerges. Canada is building a strong framework around issuer safety and consumer protection, but the FATF recommendations emphasize transaction monitoring and ecosystem-wide AML controls.
This article takes the conclusions from the FATF Target Report on Stablecoins and Unhosted wallets and applies them to the current proposed Canadian Stablecoin. Looking at the two together provides a useful checklist for how aligned Canada currently is with the FATF direction.
Table of Contents
Bringing Stablecoins Inside AML and CFT Regulation
One of FATF’s most basic recommendations is that stablecoin arrangements must fall clearly within anti-money-laundering and counter-terrorist-financing regulations.
In Canada, AML obligations already exist through the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the supervision of FINTRAC. Crypto exchanges and virtual asset service providers already operate under these rules. They must perform know-your-customer checks, monitor transactions, and file suspicious activity reports.
The proposed stablecoin framework does not replace this system. Instead, it sits beside it. The new rules focus mainly on the issuer of the stablecoin, not on every participant in the ecosystem.
Canada is partially aligned with FATF here. The AML framework already exists, but the stablecoin proposal itself is not designed primarily as an AML regulation.
Applying the Travel Rule, listing Senders and Receivers
FATF has pushed strongly for the travel rule in crypto markets. This rule requires financial institutions to transmit identifying information about the sender and recipient when funds are transferred.
Canada has already implemented this through FINTRAC guidance for virtual currency transfers. In practice, this means exchanges and other regulated entities must collect and share originator and beneficiary information for transfers above the reporting threshold.
Stablecoin transfers handled by regulated platforms are already subject to these rules. Because of that, Canada is already aligned with FATF on this point.
The important nuance is that the travel rule applies primarily to regulated intermediaries, not to peer-to-peer transactions between private wallets.
Clarifying Responsibility in the Stablecoin Ecosystem
FATF’s report emphasizes that stablecoin arrangements often involve multiple actors. These can include issuers, reserve custodians, governance foundations, wallet providers, and exchanges.
One of FATF’s concerns is that responsibility can become unclear when these roles are split across jurisdictions.
Canada’s proposed framework addresses this issue by putting the issuer at the center of the regulatory model. Stablecoin issuers would be required to register with the Bank of Canada. They would have responsibilities related to reserves, redemption rights, reporting, and operational resilience.
This creates a clear point of accountability. However, the wider ecosystem remains divided across regulators. The Bank of Canada would oversee issuers. FINTRAC would handle AML compliance. Provincial securities regulators continue to supervise trading platforms.
Canada, therefore, has a structure for responsibility, but it is still somewhat fragmented.
Licensing and Supervising Stablecoin Actors
Another FATF recommendation is that key participants in the stablecoin ecosystem should be licensed or registered.
Canada’s proposal clearly meets this requirement for issuers. Stablecoin issuers would need to register with the Bank of Canada and comply with ongoing supervision.
The framework also interacts with the Retail Payment Activities Act, which may bring additional payment service providers into regulatory oversight if they control payment functionality or private keys.
What is less clear is how broadly the licensing perimeter will extend. Much will depend on how future regulations define roles such as wallet providers, custodians, and payment intermediaries.
For now, Canada is strongly aligned with FATF on issuer supervision but only partially aligned when considering the broader ecosystem.
Addressing Peer-to-Peer Stablecoin Transfers
One of the most significant concerns in the FATF report is the growth of peer-to-peer stablecoin transfers.
Stablecoins can move directly between wallets without passing through a regulated exchange or financial institution. In these cases, traditional AML tools such as KYC checks or transaction monitoring may not apply.
Canada’s proposed stablecoin framework does not directly address this issue. The framework focuses mainly on issuer obligations such as reserve backing and redemption rights.
Existing FINTRAC rules capture transactions when funds move through regulated entities. But direct wallet-to-wallet transfers remain outside that perimeter unless they later interact with a regulated platform.
This area represents one of the biggest differences between FATF’s emphasis and Canada’s current proposal.
Managing Risk from Unhosted Wallets
Closely related to peer-to-peer transfers is the question of unhosted wallets. These are wallets where individuals control their own private keys without using a custodial service.
FATF recommends that financial institutions apply enhanced risk controls when transactions involve unhosted wallets. These controls could include additional due diligence or risk assessment procedures.
Canada already recognizes unhosted wallets within FINTRAC reporting requirements. Virtual currency transaction reports often include information about transfers involving private wallets.
However, the proposed stablecoin framework does not create a new set of controls specifically targeting unhosted wallets. From a FATF perspective, this area remains underdeveloped in Canada’s proposal.
Monitoring and Blockchain Analytics
FATF also encourages the use of blockchain analytics tools to detect suspicious activity and track illicit financial flows.
These tools are already widely used in the private sector, particularly by exchanges and investigative firms. They help identify patterns associated with fraud, sanctions evasion, and money laundering.
Canada’s regulatory framework does not explicitly require the use of blockchain analytics tools. Instead, institutions are expected to meet general AML monitoring obligations under FINTRAC rules.
In practice, many firms use these tools already. But the requirement is not clearly written into the proposed stablecoin legislation.
Transparency of Reserves and Redemption Rights
Where Canada’s proposal becomes particularly strong is in the area of stablecoin safety and transparency.
The framework requires issuers to maintain reserves that fully back the value of the stablecoins in circulation. These reserves must be segregated and held with qualified custodians.
Holders must also have the right to redeem stablecoins at par value in the underlying fiat currency.
These requirements address one of the major risks seen in earlier stablecoin failures, where reserves were unclear or poorly managed.
While FATF’s report focuses mainly on AML risk, strong reserve transparency also contributes to overall financial integrity. On this point, Canada is very well aligned with international expectations.
Governance and Operational Resilience
The proposed framework also requires stablecoin issuers to maintain clear governance structures and operational risk controls.
Issuers would need policies covering risk management, data security, operational resilience, and incident reporting. They would also be required to notify regulators about significant operational changes.
These provisions reflect the reality that stablecoins are increasingly being treated as payment infrastructure, not just crypto assets.
The Bigger Picture
When viewed through the FATF lens, Canada’s proposed stablecoin framework shows a clear regulatory philosophy.
The priority is making stablecoins safe and reliable as financial instruments. The framework focuses on reserves, redemption rights, governance, and issuer oversight.
FATF’s focus is somewhat different. It is concerned primarily with how stablecoins move across the financial system and how they might be used in illicit finance.
Both perspectives are valid, but they operate at different layers of the ecosystem.
The result is that Canada’s proposal is strongest on issuer stability and consumer protection, while FATF’s recommendations push harder on transaction monitoring and peer-to-peer risk.
As stablecoin adoption grows, the interaction between these two regulatory priorities will likely become more important. Governments will need to ensure that stablecoins are both financially sound and difficult to misuse.
Canada has made meaningful progress on the first objective. The next phase of regulation will likely determine how fully it addresses the second.
Key Points
- FATF warns that stablecoins are increasingly used in illicit finance, especially through peer-to-peer transfers and unhosted wallets that bypass traditional AML monitoring.
- Canada’s proposed stablecoin framework focuses mainly on issuer regulation, reserve transparency, and consumer protection rather than ecosystem-wide AML enforcement.
- Existing Canadian AML obligations already apply through FINTRAC, including KYC requirements, suspicious transaction reporting, and implementation of the crypto Travel Rule.
- FATF emphasizes stronger controls across the entire stablecoin ecosystem, including monitoring peer-to-peer transfers and applying enhanced risk management to unhosted wallets.
- The main regulatory gap is that Canada’s proposal prioritizes financial stability and issuer oversight, while FATF pushes for stronger transaction monitoring and illicit finance mitigation across the broader crypto environment.
Related Links
- FATF Targeted Report on Stablecoins and Unhosted Wallets
- FATF Targeted Update on Implementation of the Standards for Virtual Assets and VASPs
- FATF Outcomes of the February 2026 Plenary Meeting
- FATF Targeted Update on Implementation of AML/CFT Standards for Virtual Assets (PDF)
Other FinCrime Central Articles Written By Adeel Khamisa
Some of FinCrime Central’s articles may have been enriched or edited with the help of AI tools. It may contain unintentional errors.
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