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Recent News

In a recent development, Tether, a prominent player in the cryptocurrency arena, has taken a decisive step to align with regulatory compliance by implementing a 'freeze' on its tokens in wallets associated with individuals on the U.S. Office of Foreign Assets Control's Specially Designated Nationals list. The OFAC SDN List, integral to this development, comprises individuals, entities, or groups that the U.S. government identifies as subject to economic sanctions. These sanctions typically target those engaged in activities that pose threats to U.S. national security and foreign policy, including terrorism, drug trafficking, and weapons proliferation. This move underscores Tether's commitment to preventing the potential misuse of its tokens in activities that could undermine legal and ethical standards.

An examination of Etherscan data indicates that Tether's actions impacted ~160 Ethereum wallets. Further scrutiny of the situation reveals that one of the sanctioned wallets had transacted over $400,000 in USDT, sourced from THORChain, just a day prior to the freeze. The on-chain data also discloses that several of these sanctioned wallets had interactions with Tornado Cash in the preceding six months. One such wallet has been associated with the infamous $625 million Ronin Bridge attack, which the U.S. Treasury Department attributes to the North Korean hacking group, Lazarus Group.

Tether Loves Freezing Accounts?

The stablecoin sector, notably represented by USDT and USDC, presents a complex landscape of centralization and counterparty risk despite the decentralized ethos typically associated with cryptocurrencies. These stablecoins, governed by regulated, profit-oriented companies, Tether and Circle, respectively, demonstrate a significant level of centralized control. This authority is evident in their ability to mint new coins and, more critically, freeze existing assets. The frequent exercise of this power to "blacklist" addresses and immobilize funds held within them deviates starkly from the general perception of cryptocurrency's foundational principles.

This centralized approach has real-world implications, particularly for individuals in countries experiencing extreme inflation, economic instability, or stringent capital controls. Citizens of nations like Iran, Syria, and Venezuela, for example, face some of the world's highest inflation rates. Ironically, these are the very populations that could greatly benefit from access to stablecoins like USDT and USDC. However, the sanctions imposed by the U.S. against these countries often result in these citizens being denied access to these assets. The freezing of assets due to geopolitical factors highlights a significant limitation of these centralized, fiat-backed stablecoins in addressing the needs of such marginalized groups. It underscores the potential value of a truly decentralized, crypto-native stablecoin or asset, which could offer a more inclusive financial solution free from the influence of geopolitical tensions.

Moreover, the design and operational model of USDT and USDC require users to place complete trust in Tether and Circle's management of their global operations, involving hundreds of billions of dollars. This trust is pivotal, as any mismanagement or operational failure by either of these entities has the potential to trigger widespread repercussions throughout the entire crypto economy. The reliance on these companies to maintain stability and integrity in their operations highlights a critical vulnerability in the current stablecoin framework, raising questions about the sustainability and reliability of such centralized structures in the decentralized world of cryptocurrencies.

Tether’s history of blacklisting addresses, freezing funds, and complying with regulatory pressures pose remarkable censorship risks. In 2020 alone, 84 addresses have been blacklisted, meaning the funds held by these wallets are completely unusable.

The number of blacklisted USDT addresses.  Source: TheBlock

In October 2020, Tether froze $300,000 worth of USDT after the LAPD reported a theft involving hackers stealing private key information from note-taking app Evernote. The keys were used to authorize spends from the owner’s wallet to the hacker’s wallets. Subsequently, the US government is finalizing the seizure of the USDT, stating the hackers are in violation of Section 1030 of the Civil Forfeiture code for “fraud and related activity in connection with computers.”

Looking ahead, Tether, which had previously shown reluctance to freeze wallets associated with the controversial protocol Tornado Cash, has now proactively blacklisted its contract addresses. This decision, as articulated by Tether’s CEO Paolo Ardoino, represents an expansion in their collaboration with global law enforcement and regulatory bodies. This proactive stance was recently observed when Tether froze 32 wallets linked to terrorism in Ukraine and Israel in October, and another instance last month when Tether froze $225 million connected to a human trafficking ring, following an investigation by the U.S. Department of Justice.