FATF's July 16 update warns DeFi compliance gaps could trigger outright bans. 83% of countries have Travel Rule laws, but enforcement lags on stablecoins and unhosted wallets.
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FATF published its seventh targeted update on virtual assets and virtual asset service providers on July 16. The update warns that countries are failing to supervise decentralized finance, and the consequences could include outright bans for platforms that do not comply.
Eighty-three percent of jurisdictions have enacted Travel Rule legislation, up from 73% in 2025.
Passing a law and enforcing it are two different things, the update notes. Many jurisdictions still cannot identify who controls DeFi protocols, the watchdog said.
Regulated institutions, including traditional banks and licensed exchanges, are engaging more with DeFi platforms. The risk of illicit flows contaminating compliant financial infrastructure grows alongside that engagement, according to the FATF update.
The update flags stablecoins and unhosted wallets as areas requiring more rigorous risk-based supervision. Stablecoins have drawn attention for their role in sanctions evasion and cross-border capital movement at scale, the FATF said. The growing institutional push into stablecoins has made them a focal point for regulators.
FATF said a growing number of jurisdictions have moved toward outright prohibition for non-compliant DeFi platforms. The watchdog added that jurisdictions banning DeFi activity without effective detection and sanctions mechanisms risk creating enforcement gaps rather than closing them.
Platforms operating outside licensing requirements and those failing to implement Travel Rule procedures are the direct target of the update's harder language. The option of an outright ban is described as a legitimate tool for jurisdictions with the infrastructure to make it stick.
FATF called for stronger public-private partnerships and enhanced cross-border cooperation. The CFTC's lone commissioner and fragmented U.S. oversight show the coordination challenges the watchdog aims to address. Member countries are expected to align their frameworks with FATF standards. Non-compliance at the country level typically triggers grey-listing or black-listing consequences that affect every financial institution operating in that jurisdiction.
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