Deep freeze: FATF urges new stablecoin AML controls

The Financial Action Task Force (FATF) recently released its Targeted Report on Stablecoins and Unhosted Wallets, positioning stablecoin “freezing” in the secondary market as an emerging AML/CTF control. At the same time, Circle’s recent freeze of USDC across 16 operational wallets demonstrates how these controls operate in practice, and why unlimited freeze powers pose market and security risks as financial markets move on-chain and particularly for decentralised finance (DeFi).

The FATF Report points to a growing regulatory and technical reality: compliance expectations are expanding beyond intermediaries to stablecoin issuers themselves. This shift could entrench censorship capability, centralised governance and single points of failure, introducing counterparty and security risks under the guise of well intentioned efforts to tackle financial crime.

Freezing moves from theory to practice

FATF’s March 2026 report highlights the rapid growth of stablecoins, with more than 250 in circulation and aggregate market capitalisation exceeding USD 300 billion by mid‑2025, now accounting for approximately 84% of illicit virtual‑asset transaction volume according to FATF data.

FATF’s Report observes that illicit stablecoin activity is increasingly occurring in the secondary market, particularly via peer‑to‑peer transfers using unhosted wallets, where transactions often take place without customer due diligence, transaction monitoring, or a clearly responsible reporting entity.

To address this “secondary‑market gap,” FATF explicitly points to issuer‑level programmable controls, including freezing, deny‑listing and similar smart‑contract controls, as “good practices” capable of disrupting illicit flows where intermediaries are absent. The report encourages jurisdictions that are developing regulatory frameworks for stablecoins to consider the freezing of stablecoins as part of their AML/CFT toolkit.

What freezing achieves - and what it breaks

From a technical perspective, freezing renders stablecoins economically immobilised but still on‑chain, preserving visibility while preventing transfer, redemption or use. FATF notes that freezing may be applied even where wallet holders are unidentified, making it a blunt but effective intervention tool where attribution is incomplete.

However, issuer‑level freezing reintroduces asset‑level censorship, concentrates governance and legal risk in a single controlling entity, and creates single points of failure, allowing broad or mistaken freeze decisions to disrupt liquidity, protocols and users far removed from any wrongdoing.

Case study: USDC’s 16‑wallet freeze

Circle’s reported late‑March 2026 freeze of USDC across 16 “hot wallets,” apparently linked to a sealed US civil case, illustrates these risks. The frozen wallets appeared to be ordinary operational business wallets, including infrastructure‑linked addresses, not sanctioned or criminal actors. According to reports, at least one wallet was later unfrozen following public scrutiny.

While well-intentioned, issuer‑level freezing can spill into protocol infrastructure, disrupt live operations and strand downstream users with no legal or practical recourse - even in civil disputes unrelated to illicit conduct. This could introduce new systemtic risks where end users increasingly rely on on-chain market infrastructure or in the event of a hack or security breach.

GENIUS Act raises the stakes

In the United States, the GENIUS Act establishes a federal regime for payment stablecoins but leaves critical AML rules to be written by FinCEN and Treasury. Those rules could shape how freezing occurs in the on-chain economy. In that context, it is important to balance competing policy objectives by targeting financial crime while not introducing new risks to market integrity or the free flow of capital. These risks are unique to the on-chain economy, where it is possible to identify illicit activity several hops away from the transaction in question. To that end, blockchain software provides a powerful (and potentially all powerful) tool for targeting financial crime but which can also be abused or used as a censorship tool. Similar concerns have been raised in relation to the widespread adoption of central bank digital currencies.

Bottom line

If adopted more broadly, FATF’s approach would require stablecoin issues to embed powerful centralised freezing controls. Without close consultation with industry, well‑intentioned AML/CTF measures, particularly around freezing, risk inadvertently undermining innovation, market confidence and the resilience of decentralised financial systems at scale. These developments can have downstream effects on decentralised systems, shaping liquidity, settlement and user experience. As expectations around secondary‑market freezing continue to evolve, policy makers will need to balance competing policy objectives to ensure secure and robust on-chain financial markets.

Written by Steven Pettigrove, Katrina Sharman and Sophie Nguyen