SINN Féin Foyle MLA Raymond McCartney said that any genuine move by loyalists towards disbandment would be a positive step.
He made his comments following a statement on Tuesday by the UVF, UDA and Red Hand Commando that they now “eschewed criminality”.
The terror groups said they are to form the Loyalist Communities Council.
The loyalist paramilitaries have murdered 51 people since it announced its ceasefire in October 1994.
The UVF alone have murdered 31 people in that time – all Protestants.
Two weeks ago, loyalist paramilitaries were blamed for detonating a pipe bomb on the window of a house in Derry’s Lincoln Court where a transgender woman lived.
Raymond McCartney said: “In recent months alone unionist paramilitary groups have murdered Brian McIlhagga in Ballymoney and are involved in on-going drug dealing and extortion.
“The continuing criminality of loyalist paramilitary groups remains a scourge in loyalist working-class areas.
“So, while I welcome this initiative, I do have some reservations.
“The demand for an end to historic prosecutions must be rejected as it flies in the face of the Stormont House Agreement which was about enabling families the opportunity to have maximum disclosure of the truth and access to justice.
“A large number of loyalist killings were carried out with the support and active involvement of British state forces and have never been properly investigated.
“Secondly, the only basis for involvement in political negotiations is through the democratic process of elections.
“However, engagement with loyalists to move them away from violence and criminality is something I would encourage.
“And we also need to be conscious of the sense of abandonment felt in loyalist communities and of the need to address loyalist disengagement from the political process.
“All paramilitary groups – including so called republican ones – need to embrace our peace and political processes and develop their own political projects through solely peaceful and democratic means.
“This raises the issue of the demobilisation of such groups, an issue which requires further consideration and discussion.
“But funding proposals aimed at tackling deprivation and disadvantage must be based on proven objective need.”
