Stablecoins: Understanding ML/TF Risks and Regulatory Developments

Regulators are concerned about satablecoins as they can represent ML/TF (money laundering and terrorism financing) risks. The recent increase in usage of stablecoins reinforced these concerns. According to the market data provider CryptoQuant, stablecoins held on exchanges rose to an all-time high on March 28, 2021, at more than $10 billion¹. At the beginning of the year, stablecoins held on exchanges already reached an all-time high surpassing $4.8 billion². This amount doubled in just a few months.

What are stablecoins?

A stablecoin is a type of digital asset that is backed by another asset with the goal of stabilizing its price. A stablecoin can be backed for example:

by fiat like the US Dollar, for the USD Coin (USDC)
by a commodity like gold for Paxos Gold (PAXG); or
by another cryptocurrency for example Dai (DAI).

One advantage of these stablecoins is that owners don’t need to rely on an intermediary to exchange their coins, just like cryptocurrencies. On the other hand, one of the drawbacks is that the value of the stablecoin is tied to the value of another asset and will fluctuate accordingly.

Stablecoins and ML/TF regulations

Stablecoin is a hot topic for regulators as more and more jurisdictions are planning to issue rules to regulate stablecoins lately.

Regulatory developments on stablecoins in the UK

For example, in January 2021, the UK issued a consultation paper “UK regulatory approach to cryptoassets and stablecoins: Consultation and call for evidence”³ asking for feedback from the industry’s stakeholders. The UK was seeking feedback on:

how to sustain the crypto industry while mitigating related risks; and
how to handle new challenges from stablecoins.

The comment period for this consultation ended on March 21, 2021. In late March, UK’s financial services minister, John Glen also said the country will focus on regulating stablecoins before intervening in the broader cryptocurrency market, as reported by Reuters⁴.

In Thailand

Thailand’s Central Bank is also planning to issue a regulation on stablecoins this year⁵. In mid-March, the Central Bank states in a press release⁶ that Thai Bhat backed-stablecoins which are a means of exchange are e-money and fall under Payment Systems Act 2017. For other stablecoins, the Bank of Thailand states that it is open to comments before considering stablecoin related regulation. This press release on stablecoins follows a warning from the Central Bank about an unregulated stablecoin backed to the Thai Baht⁷ and from which stems an increased risk in ML and cyber theft.

FATF’s stance on stablecoins and ML/TF risks

Besides, the FATF also plans to bring stablecoins into the scope of its guidelines. In March 2021, the Financial Action Task Force (FATF) proposed a draft updated guidance on Virtual Asset Service Providers (VASPs). The proposal aims at giving guidance on how to apply FATF’s standards to stablecoins. In this draft guidance, the FATF addresses issues related to stablecoins. The guidance states that:

stablecoins and their services providers shall be considered as VAs and VASPs; and
stablecoins should be subject to AML/CFT controls (especially the ones that can be massively adopted or used in P2P transactions).

Stablecoins’ ML/TF risks

Stabecoins can also be risky and represent a threat to investors. In June 2020, the FATF released the FATF’s Report to the G20 Finance Ministers and Central Bank Governors on So-called Stablecoins⁸. This report identifies the particular money laundering (ML) and terrorism financing (TF) risks that can stem from stablecoins:

Anonymity: customer information may not be available on the ledger unlike transaction information
Global reach: stablecoins allows faster, cheaper, and more efficient cross border payments;
Layering: chain-hopping (exchanging a crypto for another rapidly) creates multiple layers of illicit funds and can disguise the origin of funds.

Besides, in the draft guidance mentioned above, the FATF also gives examples of steps that can help to mitigate ML/TF risks associated with stablecoins such as:

Limiting the ability to transact anonymously;
Ensuring that AML/CFT obligations of entities are fulfilled (“e.g. by using software to monitor transactions and detect suspicious activity”)

Stablecoins ML/TF risk monitoring with Scorechain

Scorechain Blockchain Analytics Platform covers stablecoins and provides compliance teams with useful tools to deal with ML/TF risks related to stablecoins such as:

Blockchain deanonymization: data on addresses such as entity name, type…;
Risk indicators: customizable to suit your internal process;
Risk scoring: ranging from 1 to 100 to indicate the risk of the funds at the level of transaction/address/wallet;
Know-your-transaction (KYT) and Know-your-address (KYA) Reports: useful for STRs (Suspicious Transaction Reporting)

Scoring for USD Coin on Scorechain Blockchain Analytics platform

As more and more governments are looking to implement rules for stablecoins, crypto businesses need to have in place processes to mitigate ML/TF risks related to stablecoins. Want to know more about how you can use Scorechain to monitor stablecoins? Contact us for a free demo: contact@scorechain.com

About Scorechain

Scorechain is a Risk-AML software provider for cryptocurrencies and digital assets. As a European leader in crypto compliance since 2015, the Luxembourgish company serves worldwide customers in 33 different countries with more than 150 licenses established, ranging from cryptocurrency businesses to financial institutions with crypto trading, custody branch, digital assets customers onboarding, audit and law firms and some LEAs.

Scorechain solution supports Bitcoin analytics with Lightning Network, Ethereum analytics with all ERC20 tokens and stablecoins, Litecoin, Bitcoin Cash, Dash, XRP Ledger and Tezos. The software can de-anonymize the Blockchain data and connect with sanction lists to provide a risk scoring on digital assets transactions, addresses and entities. The risk assessment methodology applied by Scorechain has been verified and can be fully customizable to fit all jurisdictions. 300+ risk-AML scenarios are provided to its customers with a wide range of risk indicators so businesses under the scope of the crypto regulation can report suspicious activity to authorities with enhanced due diligence.