Virtual currencies and the risk of proliferation financing

As virtual currencies (virtual assets – VAs) become increasingly widespread, the Financial Action Task Force (FATF) published two important reports in June 2025 highlighting the major risk of VAs being exploited for proliferation financing (PF). The reports “Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers”[1] and “Complex Proliferation Financing and Sanctions Evasion Schemes”[2] warn that, despite regulatory progress, the global financial system still has major loopholes that criminal networks can exploit.

Global progress and regulatory gaps

According to the report “Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers” (26 June 2025), 99 jurisdictions have passed or are finalising legislation implementing the transfer rule[3] (Travel Rule) for virtual assets to increase the transparency of cross-border transactions and help detect risks of money laundering (ML), terrorist financing (TF) and PF. Jurisdictions accounting for 98% of the global VA market (such as the United States, the EU and Singapore) have made progress in licensing and supervising virtual asset service providers (VASPs), with 73% of jurisdictions having taken enforcement action. However, only 29% of jurisdictions are rated “largely compliant” with FATF Recommendation 15 (R.15), while 20% have chosen to prohibit VAs partially or entirely owing to risk concerns.

The report “Complex Proliferation Financing and Sanctions Evasion Schemes” (20 June 2025) shows that only 16% of jurisdictions demonstrated a high level of effectiveness in implementing Immediate Outcome 11 (IO.11)[4] on targeted financial sanctions (TFS) under United Nations Security Council resolutions on the proliferation of weapons of mass destruction (WMD). The gaps include a lack of public–private coordination, weak transparency of beneficial ownership information (BOI) and poor capacity to supervise foreign VASPs.

Key risks from virtual currencies in PF

Being borderless and intangible, VAs can easily be misused to evade sanctions, move funds and procure dual-use goods for WMD programmes. The FATF reports highlight four main risks:

- Use of payment intermediaries and front companies: concealing the origin of PF funds through unregistered VASPs.

- Concealment of BOI: using VAs to access the financial system without revealing identity.

- Exploitation of VA technologies: including stablecoins[5] and DeFi[6], which account for the majority of illicit activity on blockchains (USD 51 billion in 2024).

- Maritime and transport sectors: combined with VAs to transport WMD materials.

Implications for Vietnam and the Asia-Pacific region

Vietnam is currently on the FATF list of jurisdictions under increased monitoring (the grey list) and faces major challenges in managing VA risks related to PF. According to the report “Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers” published in June 2025, Vietnam is assessed as one of 29 jurisdictions with materially important VASP activity (accounting for around 98% of the global VA market), yet its level of compliance with FATF Recommendation 15 (R.15) remains low, resulting in high ML, TF and PF risks. Therefore, according to the FATF, Vietnam needs to promptly complete its legal framework on virtual assets, decide clearly on its approach (permit or prohibit), require the licensing and registration of VASPs, implement the Travel Rule with a threshold of USD 1,000 or more, and establish an inter-agency supervisory body (led by the State Bank of Vietnam in coordination with the Ministries of National Defence, Public Security, Finance, Foreign Affairs, etc.) to strengthen the national risk assessment of stablecoins and DeFi, while pursuing public–private cooperation with blockchain analytics companies to trace suspicious transactions, with a view to mitigating PF/ML/TF risks and exiting the FATF grey list.

With the boom in VAs, acting now is essential to protect global financial security and prevent PF – a threat to regional peace.

Vu Quang Dai – Centre 81

[1] https://www.fatf-gafi.org/en/publications/Fatfrecommendations/targeted-update-virtual-assets-vasps-2025.html.

[2] https://www.fatf-gafi.org/en/publications/Financingofproliferation/complex-proliferation-financing-sanction-evasion-schemes.html.

[3] The transfer rule (Travel Rule) is a mandatory requirement for VASPs to obtain and transmit originator and beneficiary information for VA transactions above a specified threshold, similar to the requirement applicable to traditional bank wire transfers.

[4] IO.11 – Assessment of the effectiveness of the implementation of TFS under United Nations Security Council resolutions on the proliferation of WMD.

[5] Stablecoins are virtual assets designed to maintain a stable value by reference to fiat currency, commodities or other assets, or through algorithmic mechanisms.

[6] DeFi (decentralised finance) refers to financial protocols deployed on public blockchains that enable financial services (lending, borrowing, trading, insurance, etc.) to be provided without traditional intermediaries (banks, centralised exchanges), through self-executing computer programs deployed on the blockchain.