There's a lot of great advice on this thread OP.
They have welcomed me into their family.
There is no way that I would stop my boyfriend's Mum from seeing our children when we have them. She will be a fantastic grandmother one day.
She has already proven she is an appalling mother figure to bring such a dangerous person into her son's life. Why do you think she'll be a "fantastic grandmother"? Because she's welcoming and a good host? It takes more than that to be a good grannie. My mil is a self-proclaimed matriarch whose family is THE most important thing. Yet when a problem arises and her family need her most she sticks her head in the sand and pretends everything's fine, there are no problems in her perfect family! One of many reasons I'm nc with her. Your future mil at best sounds like this: in total denial, putting on a front.
I agree with pp that it's manipulative of all three of them to tell you like this, almost grooming you to accept it as "ok" to have a paedophile around any future children. They let you get close to them all for a few years then "oh by the way SD abused children...it was twenty years ago though! He's on meds now, he's fiiine!" Is he fuck.
Myself and my boyfriend agreed that, should we have children, then as long as his step-dad is never alone with them, then of course they will see them.
If you do have a baby I guarantee you'll change your mind on this, but your boyfriend might not. That would be a huge source of conflict. Even if you do go along with their assurance that SD will never be alone with them, this won't be guaranteed and policing it will be exhausting. What about when you're in work and DP has them for the day to himself? He visits his mum and SD without you. Leaves your child with her while he does a bit of shopping. He'll think it ok because you won't know and his mum's there so nothing will happen, right? Until his mum nips to the loo/other room/takes a phone call/etc.
The more time goes on I'd bet you'd start to get pressure from all sides to let your child sleep over too. "DC is ten now, SD has been on his best behaviour! Why not let them sleep over? It's been 30 odd years since he last abused a child and he's still on meds! Poor mil just wants to be a good grannie!" Well she shouldn't have married a child abuser then.
I could never sit down for a meal with him again, or even breathe the same air. I'm all for rehabilitation and second chances for criminals, but not in this case. What would your family have to say if they knew? Are there children on your side? Thinking about occasions when you come together and other people's children are exposed to him... wedding, christening, your child's birthday parties.
Sorry OP, this is an awful situation for you. The sort of future you imagined with your DP and his family has been shot down in flames. I feel for your DP but in your position I'd get the hell away from them all.