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Sure, stablecoins are a threat to traditional banking and a money launderer’s best friend, but they will also allow AI agents to buy your groceries while you sleep.
- FATF wants freezing coded into stablecoin smart contracts
- BIS says Aristotle would know how to handle stablecoins
- ECB agrees with U.S. banks: stablecoins cause deposit flight
- Gentlemen prefer blondes, AI agents prefer stablecoins
- A7A5 “expressly designed to bypass the traditional financial system”
This week has seen a flurry of reports from international financial heavyweights that have been monitoring the growing adoption of stablecoins and pondering what that adoption means for existing monetary systems.
There’s nothing particularly earth-shattering in these reports, all of which show financial authorities struggling to achieve a globally consistent regulatory framework despite wildly different approaches from jurisdiction to jurisdiction. Simply put, the technology is moving faster than most individual nations can handle, so herding these global cats is a tall order indeed.
We’ll start with the Targeted Report on Stablecoins and Unhosted Wallets by the Financial Action Task Force (FATF), the global organization that aims to rein in illicit financial activity.
The FATF notes that there are now over 250 stablecoins in circulation with a combined market cap of ~US$314 billion. And while mainstream finance is finding legitimate use cases for stablecoins, their “distinctive features—price stability, high liquidity, interoperability—also make them attractive tools for threat actors.”
Peer-to-peer stablecoin transactions via digital wallets not connected to a third-party platform “represent a key vulnerability in the stablecoin ecosystem.” The FATF admits that data on stablecoin usage remains thin, and warns that authorities and commercial entities need to “closely monitor whether stablecoins are increasingly used for purchases without reliance on traditional on- and off-ramps.”
The report notes that while some jurisdictions have implemented regulatory and supervisory frameworks for stablecoins, others, particularly in emerging markets, lack the necessary know-how and technical infrastructure. The FATF recommends that more established jurisdictions lend a helping hand to regulatory laggards to improve international coordination.
The FATF is encouraged by jurisdictions that require stablecoin issuers to “embed programmable controls in stablecoin smart contracts, to support freezing, deny-listing, or other risk mitigation actions in secondary markets.”
It will surprise no one that USDT, the market-leading stablecoin issued by Tether, makes over a dozen appearances in the FATF report, primarily in case studies of criminals and rogue states like North Korea laundering ill-gotten gains. But the report warns that Tether’s newfound commitment to freezing USDT at the request of U.S. law enforcement could push bad actors to stablecoins such as DAI “that do not have a freeze function.”
USDT’s closest rival, USDC, issued by U.S.-based Circle (NASDAQ: CRCL), is also singled out as a popular option for laundering funds, although USDC only warrants about a third of USDT’s mentions in the FATF report.
BIS takes a page from the Greeks
Our second report (From cash to crypto: towards a consistent regulatory approach to illicit payments) comes from the Bank for International Settlements (BIS). The report calls for “a holistic analysis of the effectiveness of anti-money laundering (AML) and combating the financing of terrorism (CFT) regimes across different payment instruments.” The BIS wants these regimes to apply to both stablecoins and central bank digital currencies (CBDC) like the digital euro (which is still stuck in pilot project mode).
The BIS also desires “a consistent regulatory approach that is adaptable to future digital innovations,” which seems a tall order given the difficulties that authorities are having simply adjusting to the current reality. The BIS suggests focusing on “how payment instruments differ in terms of the involvement of intermediaries.”
This difference could explain why CBDCs have so far failed to achieve the kind of adoption that stablecoins have enjoyed. Bad actors “shift their activity towards the least monitored payment instruments in order to maximize the expected net return from non-compliance.” But legitimate actors may also choose “the least intermediated and monitored option” due to “concerns about their privacy or doubts about their intermediaries’ ability and willingness to protect their payments data.”
The BIS suggests taking a page out of Aristotle’s book by “treating equals equally and unequals unequally, with a crucial emphasis on proportionality … Commercial banks, e-money institutions, PSPs [payment service providers] that intermediate online CBDC and wallet service providers alike should be subject to the same set of AML/CFT requirements.”
For transactions in which intermediaries don’t play a role, the BIS envisions leveraging “touch points, or entry/exit points, where illicit funds interact” with intermediaries. The BIS admits that this is only a partial solution given its lack of insight into P2P transactions.
The BIS also suggests that programming transaction limits into CBDCs and smart contracts could ensure “compliance by default,” but enforcing these limits on self-hosted wallets “would likely prove challenging.” And yet, enforcing limits for cash transfers is even more challenging, but these rules are commonplace in the physical cash environment, so the BIS isn’t willing to give up on this plan just yet.
ECB takes US banks’ side in ‘yield v reward’ fight
The European Central Bank’s (ECB) contribution to this debate (Stablecoins and monetary policy transmission) claims that stablecoin adoption “induces a deposit-substitution mechanism, whereby funds shift from retail bank deposits to digital assets.”
This echoes the view of U.S. banks that says crypto platforms are incentivizing bank customers to withdraw their deposits to chase higher rewards/yield/interest by holding stablecoins on crypto platforms. Crypto operators reject this view, and the debate has paralyzed U.S. efforts to pass legislation on the structure of digital asset markets.
The BIS further echoes the U.S. banks’ view that a mass withdrawal of customer deposits will reduce banks’ ability to issue loans, particularly for smaller community banks with shallower pockets. But the BIS goes further, suggesting that stablecoin adoption can “potentially weaken the predictability of policy actions,” although they caution that these effects “depend critically on the scale of stablecoin adoption, their design features, and their regulatory treatment.”
Finally, the BIS frets over the “growing prevalence of foreign-currency-denominated stablecoins,” specifically, dollar-backed tokens. This stance isn’t new, as much of Europe’s tradfi establishment has long bemoaned the popularity of dollar-backed tokens like USDT and USDC in what’s supposed to be the euro’s backyard.
The BIS claims that the further “diffusion” of dollar-backed tokens “is likely to increase banks’ reliance on foreign-currency wholesale funding … banks with greater exposure to this source of funding exhibit a weaker loan-supply response to domestic monetary policy shocks, indicating a weakening of monetary policy transmission and a potential erosion of monetary sovereignty.”
AI agents prefer stablecoins over fiat
The ECB might feel threatened by stablecoins, but central bankers everywhere will be feeling uneasy over a new study that claims AI agents prefer digital assets—including stablecoins and the BTC token—to fiat currencies. But before they freak out, they should read the fine print.
The study in question was conducted by the Bitcoin Policy Institute (BPI), which is not exactly lacking motivation to propagate the message that digital assets, BTC in particular, are superior to filthy fiat.
The BPI says its ‘blank slate’ study conducted over 9,000 controlled experiments with 36 frontier AI models from companies including Anthropic, OpenAI, Google (NASDAQ: GOOGL), DeepSeek, and xAI. The models were given a couple dozen scenarios and told to make financial choices based on whatever currencies the models felt were the optimal fit for each scenario.
However, the BPI put its thumb on the scale by including ‘censorship resistance’ in the factors the models were asked to consider when making their choices. A Google search of that phrase brings up nothing but blockchain-based results, which would seem to put fiat at a distinct disadvantage from the get-go.
(Imagine the Idi Amin Preservation Society conducting a survey of the 20th century’s top world leaders, then including in the criteria for consideration the phrase ‘Field Marshal Al Hadji Doctor Idi Amin Dada’ and you can see how a murderous Ugandan thug might outperform, say, FDR.)
There are a few other unsubtle hints in the prompts that appear equally intended to tilt the results in a certain direction, like telling the AIs to store value using a method “not tied to any single country’s monetary policy or banking system.” The BPI acknowledged these nudge-nudges with the caveat that “system prompt framing may influence results. Future work will test alternative framings and measure sensitivity.”
Keeping those caveats in mind, the study found that the AI agents showed a clear preference for BTC in nearly half (48.3%) of the responses, despite the network’s notoriously slow throughput, high transaction fees, and glacial transaction confirmation.
Nearly two-thirds (22 of 36) of the models made BTC their top pick for concepts such as ‘store of value’ and ‘unit of account.’ Anthropic models led the parade, choosing BTC 68% of the time, followed by DeepSeek (52%), Google (43%), and xAI (39%).
However, stablecoins ranked highest when it came to models choosing financial tools for everyday payments, with 53.2% opting for pegged tokens, compared to 36% for BTC and just 5.1% for fiat. The BPI says these ratios were replicated regardless of the platform, “revealing a consistent functional split in how AI models reason about money.”
Stablecoins also came out on top in settlement scenarios, albeit with a smaller margin of victory. Stablecoins were chosen 43.4% of the time, followed by BTC (30.9%) and ‘other crypto’ (9%), while fiat brought up the rear with 8.8%.
Before stablecoins get too full of themselves, there were 86 responses in which the AI models “independently proposed energy or compute units—joules, kilowatt-hours, GPU-hours—as a preferred unit of account. No prompt suggested this concept.”
The BPI’s takeaway from their experiment is that (surprise!) “AI agents will demand Bitcoin infrastructure.” That is, except when actually required to pay for things, which is one of the primary selling points of agentic AI. But we suppose we’ll have to wait for the Stablecoin Policy Institute’s tests to arrive at that conclusion.
From Russia with evasion
In recent years, stablecoins have become the primary financial tool for individuals/entities under U.S. economic sanctions to move money across international borders and under the noses of law enforcement. TRM Labs recently reported that sanctions-evading crypto transaction volume was up over 400% last year, and more than half of this volume was attributed to the new kid on the Russian sanctions-evading block, the ruble-denominated A7A5.
A new report from blockchain analytics firm Chainalysis found the total value of digital assets received by sanctioned entities was up 694% last year to $104 billion, of which an astonishing $93.3 billion was conducted in A7A5. Even more impressive is that this sum was transferred in just 10 months following the token’s launch early last year.
Technically, A7A5 is issued by a Kyrgyzstan-based entity, but its owners include Russia’s state-owned Promsvyazbank, and it appears to be operating with the Kremlin’s full approval. European Union and American authorities have applied sanctions to A7A5-linked entities to the alleged bewilderment of A7A5’s director of international development, Oleg Ogienko, who insists, “We do not do illegal things.”
Chainalysis said A7A5 was “functioning as a purpose-built settlement rail for sanctioned actors seeking access to the international financial system.” In what is surely praise never before lavished on a stablecoin, A7A5 “represents an evolutionary step in sanctions evasion: a token expressly designed to bypass the traditional financial system entirely.”
A7A5 defies convention by seeing its highest trading volumes between Mondays and Fridays, after which volume drops “precipitously” on weekends. Chainalysis says this suggests that A7A5 “is being used primarily as a settlement layer for the Russian government and businesses to settle cross-border accounts during business hours.”
A7A5 offers an ‘Instant Swapper’ service that converts its own tokens into dollar-denominated stablecoins, “without meaningful or no KYC [know your customer]” protocols. Some $2.2 billion has been swapped via this service, allowing sanctioned Russian entities to move money out of local banks, across international borders, and into the broader crypto economy.
Western authorities teamed up last spring to take down the Garantex digital asset exchange, but its role was soon assumed by Grinex, a Kyrgyzstan-based exchange that sprang from Garantex’s ashes. Chainalysis said Western authorities are trying to adapt to this Hydra-like resurgence by targeting the Infrastructure as a Service (IaaS) providers that help bad actors shuffle assets around.
The hope is that by “restricting hosting services, liquidity pathways, and technical backbones that keep networks online,” some of this illicit flow can be staunched at least, until the next zombie crypto rail rises.
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