Top stablecoin issuer Tether froze more than $1 million worth of USDT in a private digital wallet last week, effectively making it unusable.
Ethereum block explorer Etherscan revealed that the No. 1 issuer of stablecoins froze the 1.09 million USDT on Dec. 30.
The action was taken at the request of an unspecified regulator or law enforcement agency, a Tether spokesperson told The Block. While declining to comment on the specific case, the company said that by “freezing of addresses, Tether has been able to help recover funds stolen by hackers or are compromised.”
The move points to something that is considered a big problem that stablecoins have in the eyes of many in the crypto community, particularly privacy advocates: Unlike traditional cryptocurrencies like bitcoin, stablecoins can be frozen like funds in any bank account.
It’s one of the reasons supporters of decentralized finance advocate using DeFi stablecoins like Maker’s DAI, which are outside the control of a centralized authority that could freeze cryptocurrency.
Related: PYMNTS DeFi Series: What Are DeFi’s Top 10 Uses?
Tether is not the only stablecoin issuer that does this.
In the Sept. 20 audit of USD Coin issuer Circle Internet Financial’s cash reserves, auditor Grant Thornton — a top 10 global auditing firm — noted that it “has the ability to block individual USDC public blockchain addresses (‘addresses’) from sending and receiving USDC. This ability is referred to as ‘blacklisting.’ When an address is blacklisted, it can no longer receive USDC, and all of the USDC controlled by that address is frozen and cannot be transferred on-chain. It is not possible to blacklist individual USDC tokens.”
The audit revealed that there were 100,000 blacklisted USDC tokens extant at that time.
The No. 3 stablecoin, Binance USD, is not freezable, Binance CEO Changpeng “CZ” Zhao said in an Aug. 10, 2021, tweet after the $612 million Poly Network hack.
“While we can’t freeze funds on blockchains, if those funds land on our [Binance exchange], we will (try to) freeze them,” he said. “So, we have a lot of blockchain analysis to do. Nothing is easy. We try.”
4. Why are CEX CEOs busy while a DeFi gets hacked? We do try to help. While we can’t freeze funds on blockchains, if those funds land on our CEX (@binance), we will (try to) freeze them. So, we have a lot of blockchain analysis to do. Nothing is easy. We try.
— CZ 🔶 Binance (@cz_binance) August 10, 2021
Supporting the authorities
Freezing stablecoins may be controversial, but it is a big plus in the eyes of regulators and law enforcement agencies, which have been stepping up their actions and abilities in tracking down cryptocurrencies used in illegal actions ranging from ransomware to dark market drug sales and even funding terrorism.
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That’s a point Tether CTO Paolo Ardoino took to Twitter to make last year, after the Yearn.finance decentralized finance (DeFi) protocol was hacked last February.
Tether froze 1.7 million USDC tokens almost immediately. On Feb. 6, Ardoino defended the move, noting that USDC is a centralized stablecoin, and that “among Tether duties there is the responsibility of acting and collaborating with [law enforcement] and regulators regarding potential dangerous behavior.”
I want to use this occasion to remind everyone that Tether $USDt is a centralized stablecoin using blockchains as transport layer.
Among Tether duties there is the responsibility of acting and collaborating with LE and regulators regarding potential dangerous behavior. https://t.co/u9jGFSYEEh
— Paolo Ardoino (@paoloardoino) February 5, 2021
It’s also good politics. During the Dec. 14 stablecoin hearing in front of the Senate Banking Committee, Sen. Elizabeth Warren suggested banning U.S. banks from holding the cash assets used to back stablecoins and protect dollar peg and gave an open floor to a witness who called for an outright ban.
See also: Sen Warren Calls DeFi the ‘Most Dangerous’ Part of Crypto at Senate Hearing
Many of the U.S.-based exchanges trying to stay on regulators’ good side, like Coinbase, Kraken, Gemini and FTX.US, regularly freeze funds just like any bank or brokerage would. In fact, so do plenty of non-U.S. exchanges for reasons that have nothing to do with regulators or law enforcement: They see it as supporting the crypto community, and defending it against thieves and hackers.
At the same time, those exchanges make the case that they push back hard against unreasonable law enforcement and regulatory requests for information about customers, with Coinbase Chief Legal Officer Paul Grewal saying in a Dec. 15 transparency report that “we respect the key role of law enforcement and government agencies in pursuing bad actors who engage in prohibited activity or seek to abuse our platform.”
Read more: As Crypto Crime Grows, Exchanges Like Coinbase are Key to Catching Crooks
However, Grewal noted, “protecting the financial privacy of our customers is a fundamental part of our commitment to being the most trusted place to engage with cryptocurrency.”
His stance points to a good reason that regulators would likely prefer to deal with stablecoin issuers. It’s a lot easier to deal with a handful of stablecoin issuers than scores of exchanges.
The flip side is that when companies like Tether and Circle freeze their stablecoins, all it does is prevent the bad actors from profiting. When exchanges freeze the crypto in their wallets, it can be returned to the rightful owner.