Stablecoins are gaining increasing popularity thanks to the Genius Act. There are countless types of stablecoins: centralized ones backed 1:1 (or nearly so) by the US dollar (for example, USDC and USDT), others that are overcollateralized (such as Dai, backed by BTC, ETH, USDC, and other assets. Essentially, it is created by depositing collateral), others that are algorithmic (the most notable example being UST), others that work with rebases (AMPL), and still others with built-in yield (vyUSD, mBASIS, USDR, etc.). Those that are completely virtual and decentralized, protocol risks aside, remain uncensorable by the platforms that issue them. However, centralized ones (USDT and USDC) can easily be censored by the companies that issue them (Tether Foundation and Circle, respectively). In this article, we'll look at how censorship occurs; it's commonly believed that it only happens by moving these assets to exchanges. In reality, this isn't the case.

WHEN DOES CENSORSHIP OCCUR?
Centralized stablecoins, i.e., those issued and managed by companies that have direct control over the smart contracts governing the tokens, have the ability to "censor" addresses or funds when requested by authorities or for compliance reasons (AML, hacks, fraud investigations). Clearly, these reasons must be valid and serious; currently, censoring funds for debts owed to tax authorities or debts between private individuals is unthinkable.

CENSORSHIP TECHNIQUES
These funds do not need to be transferred to exchanges (as is required for BTC), nor are validators required to censor (although we will see that they are the ones who confirm the censorship). The power of censorship is integrated at the smart contract level. These are simply built-in functions that prevent swaps and transfers on chains using the "official" native format (some wrapped forms of USDC and USDT are more difficult to censor).

-Blacklist: Both Tether and Circle have full administrative control over ERC-20 contracts (and other chains with official native formats) of USDT/USDC. This control is performed via an administrator key controlled by the company itself.
USDC and USDT contracts include a blacklist(address) function that prevents the transfer of its tokens (they remain locked and unusable).

-Freeze/Confiscation: Circle (USDC) also has the wipeFrozenAddress() function, which allows the balance of a locked address to be reset to zero and the funds to be moved to another address (often under the control of the issuer). The USDT contract includes functions such as destroy blacklist funds, which, once applied, can reset the balance of locked addresses to zero. Tether can "freeze" USDT in a wallet, preventing any outgoing movement.

CENSOR TIME
When a sanctioned address is identified, Circle's freeze (blacklist) occurs virtually in real time (on the order of a few minutes / an Ethereum block) because the call to the blacklist(address) function is immediate once authorized.
Tether has historically been slower to freeze funds, and there's a "risk window" between the decision to freeze a wallet and the technical execution of the freeze and destroy blacklist funds function. In some documented cases, this window has allowed malicious addresses to move/sell USDT before the freeze was effective. Therefore, the delay can vary from a few hours to days, depending on collaboration with authorities and bureaucratic procedures.

CAN VALIDATORS CENSOR REQUESTS?
As mentioned, Circle and Tether have an admin key on the ERC20 contract. When they need to freeze a wallet, they execute a transaction that calls functions like:

blacklist(address) (USDC)
freeze(address) or freezeAccount(address) (USDT)

This transaction is like any other TX: it's sent to the mempool, and validators include it in a block. Validators have no active role in deciding whether a transaction is "legitimate" or not. If a contract allows a certain account (Circle) to call a function, validators execute the bytecode and update the state. It is important that the transmission be valid (correct signature, gas, nonce, etc.). In theory, a validator could refuse to include that transaction, but due to decentralization, it would easily be included by another validator. The only alternative would be coordinated censorship (such as OFAC/MEV-boost), such as the attempt in 2022 and 2023 by some MEV relayers to exclude transmissions from sanctioned addresses (Tornado Cash), but this was a voluntary policy only adopted by a few.

CENSORSHIP CASES
Circle is more active in censorship: it immediately blocks addresses linked to OFAC lists. Tether was previously slightly less centralized and applied freezes more selectively, but since 2022 it has begun to adjust more systematically, freezing large amounts between 2024 and 2025 (over 2 billion USDT). Tether has full control over Tron and the Ethereum mainnet.

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