On June 16th, an Ethereum account holding $100,000 USD worth of USDC was blacklisted by Circle, after receiving a request from the U.S. government to have it suspended.
The news marks the first time an account has been frozen by Circle since the Goldman-Sachs backed crypto company launched the USDC stablecoin in 2018.
According to a company policy document, “When an address is blacklisted, it can no longer receive USDC and all of the USDC controlled by that address is blocked and cannot be transferred on-chain." While technically reversible, the owner's stablecoins may be fully and permanently unrecoverable.
Using Etherscan, we can see the Input Data field of the transaction showing that the account has been blacklisted:
Pegged to the US dollar, traders often use stablecoins like USDC to trade in and out of volatile cryptocurrencies such as Bitcoin and Ethereum. The majority of stablecoins are issued on Ethereum, which is considered to be one of the most censorship-resistant public blockchains.
Are cryptocurrencies actually censurable?
Decentralized cryptocurrencies like Bitcoin and Ethereum cannot be censured in this way because they have no blacklisting functionality built into them. In order to censure a transaction on these networks, a majority of the miners would have to agree to rollback the blockchain.
USDC, on the other hand, is an ERC-20 token issued on the Ethereum blockchain by Circle, an American company under the jurisdiction of U.S. law. In order to comply with government orders, they wrote this blacklisting functionality into their smart contract. In fact, The USDC user agreement specifically states that accounts may be terminated under certain circumstances:
In the event that Circle learns you are making any such Prohibited Transactions, Circle will consider it to be a violation of this Agreement and may suspend or terminate your USDC Account, which can result in the potential forfeit of any US Dollar funds otherwise eligible for redemption.
While some may argue that the ability to blacklist accounts is necessary in order to stop criminals, others have pointed out that the power may eventually be abused and innocent people could have their accounts suspended.
Traders who wish to avoid having their USDC inadvertently frozen can swap it for DAI, a more censorship-resistant stablecoin. Although partially collateralized by USDC, it is also backed by a basket of other decentralized cryptocurrencies including Ethereum itself.
Why use USDC then?
Circle runs frequent audits on their collateral and operates an exchange that guarantees an exact one-to-one ratio of USDC to USD. While offering greater censorship-resistance, DAI has a less stable peg to the US dollar and no legal entity backing it up. Traders looking for a legally accountable stablecoin would likely choose USDC over DAI.
Circle's blacklisting of this account sets a precedent, and we will likely see more censorship like this in the future. Investors should be aware of the risks associated with centralized stablecoins and exchange them for more censorship-resistant alternatives if they are concerned.