The global financial watchdog has issued a stark warning about a growing threat in the cryptocurrency sector: offshore virtual asset service providers (oVASPs) creating safe havens for illicit finance.
FATF Report Highlights “Regulatory Arbitrage” by Offshore Crypto Firms
A new report from the Financial Action Task Force (FATF), the Paris-based intergovernmental body that sets global anti-money laundering (AML) standards, identifies a critical vulnerability. Titled “Understanding and Mitigating the Risks of Offshore Virtual Asset Service Providers (oVASPs),” the analysis finds that some crypto firms strategically locate operations in jurisdictions with weaker or ambiguous regulatory oversight. This “regulatory arbitrage” allows them to exploit gaps between national frameworks, significantly hampering authorities’ ability to monitor transactions and enforce AML and Counter-Terrorist Financing (CFT) rules.
“As a result, effective international co-operation may not be possible, including with the relevant oVASP supervisor, thereby limiting the effectiveness of domestic risk-mitigation measures,” the FATF report states. The core challenge is the inherently borderless nature of these businesses. A single oVASP might be legally incorporated in one country, host its digital servers in a second, and provide services to a global customer base via the internet. This complex structure creates a “responsibility gap,” where no single regulator may claim clear jurisdiction, allowing the firm to operate in a gray zone.
Why Tracking Offshore Crypto is a Regulatory Puzzle
The FATF survey underpinning the report revealed that while 83% of jurisdictions now require crypto service providers to be licensed or registered, enforcement against foreign-based entities remains difficult. Many countries struggle to even identify which offshore platforms are actively serving their residents. Without a physical presence or a local legal entity, domestic authorities often lack the legal tools or practical visibility to scrutinize these businesses or the transactions they process.
FATF survey found that 83% of jurisdictions require licensed or registered crypto service providers. Source: FATF
To combat this, the FATF is urging a proactive stance. It recommends that countries assert jurisdiction and require any VASP—including those based offshore—to comply with local registration or licensing requirements if they target or provide services to users within their borders. Furthermore, the report calls for intensified cross-border cooperation between financial intelligence units and law enforcement to share information and pursue investigations that span multiple jurisdictions.
Parallel Warning on Peer-to-Peer Stablecoin Transfers
The alert on oVASPs follows a separate FATF report focused on stablecoins and unhosted wallets. That analysis warned that peer-to-peer (P2P) transfers of crypto assets, particularly stablecoins, can create significant blind spots in the AML/CFT regime. These transactions occur directly between users’ wallets without passing through a regulated intermediary like an exchange, which traditionally acts as a gatekeeper for suspicious activity.
As stablecoins gain traction for payments and cross-border remittances, the FATF cautions that their use in direct P2P transfers could undermine existing safeguards. The organization advises jurisdictions to conduct thorough risk assessments on this activity and consider implementing targeted measures to mitigate the potential for money laundering and terrorist financing.
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