Stablecoins and sanctions - can traditional finance manage the risk?

Financial Crime Expert Colin Whitmore explores the intersection of stablecoins and sanctions. Can traditional finance manage the risk, or is it too high?

As part of our 2026 editorial journey to bridge the knowledge gap between traditional finance and Web3 payments, we explore how established financial leaders are shaping the next generation of financial infrastructure.

The Paypers continues its exploration of the convergence between traditional finance and decentralised technologies with a new editorial series called Bridging Finance: Institutional Voices on Web3 Payments, focusing on institutional transformation. Through a collection of in-depth articles and interviews, we spotlight senior financial experts and banking leaders who have not only witnessed the evolution of the traditional financial system but have also anticipated the innovation behind Web3 payment rails, tokenisation, and programmable money, while making them safe and secure.

Today we speak with financial crime expert Colin Whitmore, who explores the intersection of stablecoins and sanctions, moving risk management to the top of the innovation agenda for bankers.

Introduction

Stablecoins, like other cryptocurrencies, are based on cryptography and the blockchain; they share much in common with other cryptocurrencies. A substantial difference is, as the name suggests, their increased stability from currency volatility. They achieve this through being ‘pegged’ to global ‘Fiat’¹ currencies, for example, USDT, EURC, and XSGD². This makes them less volatile and, as a result, more reliable, for use in payments and exchange. There is a significantly higher level of certainty that the receiver will receive the correct amount of value required from a transaction, and for a buyer, that they will not be asked for additional funds due to currency de-valuation.

For firms and individuals who want a level of assurance regarding their funds, many of the well-known stablecoins are ‘backed’ by real assets, including convertible US treasury bonds.

Recently, regulators have issued new, or, updated existed guidelines and regulation to provide an enhanced legislative background for the issuing, exchange and use of stablecoins, and there is growing interest from ‘mainstream’ traditional finance ‘traditional finance’ firms.

So, if this is all good news, why are we not seeing traditional finance firms rushing into stablecoins? Are the financial crime risks preventing their entry into this evolving area?

The brief paper seeks to explore whether ‘there is an inherent sanctions risk in the ‘decentralised cryptocurrency marketplace’, does the use of stablecoins reduce this risk, and therefore provide a higher level of assurance for traditional finance firms considering entry into the stablecoins marketplace?’

Background

Cryptocurrencies have been around for over 15 years. The paper³ ‘Bitcoin: A Peer‑to‑Peer Electronic Cash System’, published in 2008, laid down the concepts of blockchain and decentralised digital money, forming the foundation of the cryptocurrency ecosystem.

Since then, the number of currencies, wallet, and service providers has exploded. In the early days, significant interest was focused on investments. The use of cryptocurrency payments has increased significantly, especially with the introduction of stablecoins, and an ecosystem of P2P firms has now developed.

Compared to SWIFT payment volumes, the crypto volume and value are small; however, that does not mean it is not significant, or can be ignored, or indeed it is not growing. In addition, where local currencies are volatile or expensive to use for cross-border transfers, there is an increased use of stablecoins facilitated through payment firms.

The recent ‘The Paypers Global Stablecoin Report 2026’⁴ suggested that the industry is approaching an important turning point, it states that ‘According to a recent EY-Parthenon survey, only a minority of financial institutions currently use stablecoins… however, more than half of those who have not yet adopted them expect to begin within the next six to twelve months.’⁵

If DeFi moves towards traditional finance, what does that mean from a sanctions risk perspective? Given the time and effort, not to mention expense, that have been and continues to be spent in traditional finance on sanctions compliance, will the adoption of stablecoins increase or decrease the sanctions risk?

The sanctions risk

Sanctions regimes have been in force for many years, well, decades. Financial Institutions, along with many other firms, have put in place systems and controls to screen individuals, entities, and payments to detect and prevent sanctioned entities from gaining access to financial ecosystem, and to screen and block payments are to / from sanctioned entities.

Focusing on payments, firms extract details from payment messages, then perform matching of the parties, countries, and other details, against ‘sanctions lists’, those issued by governments, and organisations including the UN and EU, plus FI’s own internal lists. The processes, systems, steps, the nuances, and the effectiveness of the sanctions effort are another discussion. However, the point here is that there are many controls and significant efforts, built up over the years, to identify and prevent sanctions circumvention.

Globally significant fines over the years have been imposed against FIs, where they have failed to stop sanctions payments, and significant resources, people, and effort have been invested in this area, making it a key pillar of any financial crime control framework. Figure 1 gives a high-level view of the sanctions process.

Figure 1 - Typical Sanctions Screening (traditional finance)⁶

The Sanctions payments risk presented by stablecoins manifests itself through several aspects.

Decentralised finance brings a general issue, in that a decentralised, non-trust ecosystem does not necessarily lend itself to control and regulation.

It could be argued that the very nature of the decentralised finance ecosystem is to prevent any ‘overarching’ control and regulation, like that found in traditional regulated markets.

However, as DeFi has become more mainstream, an increasing number of participants are now regulated, have standards, and controls in place, including regulated roles, such as MLRO’s, BSA⁷ officers, compliance policies, systems, people, and processes in place. Unfortunately, this does not include all participants, and will vary based on factors, with the rules and regulations varying across the industry.

Tracing payment funds from the decentralised (onchain) to fiat (offchain) ecosystems presents an issue for traditional finance firms.

Another significant issue is the tracing of payments across the on/off ramps, where the visibility of payment origination / destination can become clouded and obscured. This is not necessary due to criminal intent, but more to the way these two payment ecosystems interact, and identification data is not always passed across the ‘on/off ramps’. This loss of visibility presents a Sanctions risk to the traditional finance firms.

Figure 2 shows the role of the on/off ramps, for example, an account holder with a traditional FI sending money to an intermediate payments firm, and then from there onto their wallet on chain. The FI will see the money leave the account (with the FI), through a domestic payment rail, they will know the destination, from the payee account details, but beyond that? Not knowing the ultimate beneficiary or originator of a payment presents sanctions risk.

Figure 2- DeFi to TradFi payments and risk

Though many firms in the cryptocurrency system have adopted controls, appointed officers, and comply with regulations, it only takes a few illegitimate players to gain access to the wider payments ecosystem to facilitate sanctions circumvention.

Evolving regulation

This brief paper does not have the time to cover the regulation in this space. Suffice to say that regulators have for a while now woken up to the cryptocurrency and stablecoin risk, many have amended, or created new regulation in this space. There is variation, the EU’s MiCA act, (Markets in Crypto‑Assets Regulation) is one of the world’s most comprehensive regime, the US Genius act bough stablecoins under the Banking Security Act⁸, and other regulators are reviewing and updating regulations. This will further bring this decentralised ecosystem nearer to traditional finance, or, looking from the other way, give traditional finance a means of safely moving towards stablecoins.

Where does this leave traditional finance participants?

Payment firms who straddle both ecosystems, and those operating exclusively on the blockchain have a head start over traditional finance firms. These existing participants have real experience of having to deal with customers and payments, of having to work through the practicalities of blockchain payments, and will likely be using specialist tools for a variety of reasons, including the identification of payment origination, identifying sanctions, and money laundering risk.

Traditional finance firms, have a set of more challenging issues, which are multiplied by their general lack of knowledge and experience, and the fact that payments are not arriving via their SWIFT gateways. These firms may not easily identify that a payment into a customer’s account has originated from the blockchain or is going to the blockchain from the customer account.

Solutions?

So, where does this leave FIs, who may want to move into this area by providing a range of products around digital assets, including stablecoins, directly to their customers, or indirectly by facilitating payments?

Thankfully, there are several approaches and solutions that these firms can adopt to provide an increased level of detection and prevention, including:

Review and amend existing risk control frameworks - what is included in the current risk control framework, how can the sanctions element be enhanced to take control of the sanctions risk from stablecoins, firms should review controls, considering policy requirements, and how solutions can bring together technology, data, people, and processes.

Working with specialist providers – there are several specialist providers that have developed sophisticated software tools and approaches for analysing onchain participants, activities, and payments. Their solutions have been used extensively by the government and other participants. There is now an increasing interest from traditional finance participants, and arguably an opportunity for TradFi to engage these specialist firms.

Education and awareness – larger traditional finance firms have moved forward in terms of awareness and education for their workforces in terms of identifying and preventing financial crime. Arguably, a weak area is in terms of cryptocurrency; in traditional firms, there is a sense of ‘that’s not for us and the education has stopped there.

Onchain awareness and monitoring – it is unlikely that traditional finance firms will be able to do this themselves; however, through engagement with specialist firms, and use of their tools, with appropriate training, then there is no reason they cannot start to gain awareness of onchain activity.

Building compliance into their offering - where traditional finance firms are seeking to provide stablecoin offerings to their customers, engaging in payments or other services, they would be well advised to start from a position of compliance and create a risk framework.

Can you afford to ignore the risk?

There is a division in the traditional finance world, with some firms embracing stablecoins, some making tentative steps, and others avoiding or ignoring the matter.

Ignorance is not bliss; ignoring the sanctions risk because firms do not understand it, or lack the means to identify the risk, is not a defensible position. Firms that fail to have adequate controls will not gain favour with regulators by pleading ignorance, and worse still, they maybe unwittingly exposed to sanctions risk.

In conclusion

Stablecoins are emerging from the world of cryptocurrency to provide a stable, trustworthy form of currency exchange, with significantly reduced costs and time frames compared to traditional finance payment exchanges.

However, unlike traditional finance, the decentralised nature of the marketplace, the lack of understanding and transparency across on/off ramps, results in increased risks for firms that have failed to put in an adequate level of controls.

There is a risk of sanctions evasion, with traditional firms lacking the skills and know-how to identify and prevent payments.

However, by using specialist firms, awareness, education, and enhanced controls, there is an opportunity to manage the risk, which could lead to a wider uptake of stablecoins.

Concluding with the opening paragraph of the Wolfsberg paper on stablecoins:

‘The increased adoption of fiat-backed stablecoins represents a new financial crime risk management challenge to financial institutions (FIs). Stablecoin features offer significant legitimate benefits for individuals and businesses worldwide, however these same attributes of price stability, global reach, pseudonymity, and rapid settlement also make them attractive to illicit actors, allowing them to access major currency-denominated value without engaging traditional payment rails, including in sanctioned jurisdictions.’⁹

¹That is currencies such as the USD, EUR, and YEN that are issued by central banks.

² USDT (Tether) — pegged to the US Dollar (USD), EURC (Circle’s Euro Coin), pegged to the Euro (EUR), and XSGD — pegged to the Singapore Dollar (SGD).

³ “Bitcoin: A Peer‑to‑Peer Electronic Cash System”, published on 31 October 2008 by the pseudonymous creator Satoshi Nakamoto, cited, March 2026.

⁴ Global Stablecoins Report 2026, From Hype to Utility: How Stablecoins Are Reshaping Payments for Banks, Merchants, PSPs, and Fintechs, published by the Paypers, March 2026, cited April 2026.

⁵ Page 70, Global Stablecoins Report 2026.

⁶ Both figures 1 & 2 have been created by the author.

⁷ Money Laundering Reporting Officers, Banking Security Act (USA).

⁸ LIST.

⁹ Wolfsberg Group Guidance on the Provision of Banking Services to Fiat-backed Stablecoin Issuers, published September 2025, cited April 2026.

About the author

Former Financial Crime Director, AI, Strategy and Design, Natwest Group

Colin Whitmore is a recognised subject matter expert in Financial Crime technology, strategy, and innovation, bringing over two decades of experience across banking and financial services. He has worked with leading institutions including Thomson Reuters, Aviva, Barclays, the Royal Bank of Scotland, HSBC, and NatWest.

For the past 15 years, Colin has specialised in Financial Crime, advising senior leaders on strategy, technology, innovation, and architectural transformation. His work focuses on designing integrated solutions that combine data, technology, process, and advanced analytical approaches to strengthen Financial Crime prevention.

Stablecoins and sanctions – can traditional finance make it work, or is it a risk too high?