A financial watchdog has raised concerns that Qatar is not doing enough to address loopholes in cryptocurrency that can be exploited by terrorist groups for financing.

The Paris-based Financial Action Task Force (FATF) urged the Qatar Central Bank (QCB) to ramp up efforts to identify and sanction virtual asset service providers (VASPs) that violate the Gulf state's 2019 crypto prohibition.

“Qatar has not demonstrated that the competent authorities proactively identify and take enforcement action for potential breaches” of the prohibition on crypto firms announced by the Qatar Financial Center Regulatory Authority in 2019, the report said.

“No formal sanctions have been applied on a natural or legal person for contravening the prohibition,” even in a case where an unlicensed crypto provider was allegedly found operating in the country, it added.

The watchdog said that Qatar had a very strong overall level of compliance with FATF standards. The report cited 2,007 crypto transactions that were rejected and 43 accounts closed for digital asset links, but said more needed to be done.

Qatar’s central bank released a statement saying the report demonstrates “the country’s commitment to combatting illicit financing”.

“The State of Qatar is particularly effective in the areas of assessing and understanding the risks of money laundering and terrorism financing,” the Central Bank added.

Policymakers and regulators worldwide have been alarmed about the potential use of cryptocurrencies in financing terrorism and money laundering.

Cryptocurrencies, such as Bitcoin, provide a high degree of anonymity, which makes them appealing to criminals and groups targeted by sanctions.

FATF decisions are closely watched because they impact how countries’ financial systems are perceived around the world. The G7-created body has the power to “blacklist” banking systems if they determine enough isn’t being done to stop money laundering and terrorist financing.

On Wednesday the UAE Central Bank rolled out new anti-money laundering and counter-terrorism guidance lines for financial institutions dealing with virtual assets based on FATF guidelines.

The Gulf state, which includes the trade-to-tourism hub Dubai, was placed on the FATF 23-“grey list“ in March last year for failing to do enough to combat illicit finance. Yemen, Syria, and South Sudan are included on the list.

Washington has called the UAE a "country of focus" as it looks to crack down on Moscow’s sanctions evasion amid the war in Ukraine. Qatar, a gas-rich Gulf state of just 300,000 nationals, has generally not been a destination for wealthy Russians, but it is a base for groups like Hamas and the Taliban, which the US has labelled terrorist organisations.