Decentralized finance still mystifies many whose only exposure to the financial industry is through traditional financial institutions. Comments heard across holiday dinner tables most likely included one or two references to “that crypto stuff only being for criminals.” While decentralized finance will battle bad actors, just like all financial institutions unless we return to the bartering system and currency is never heard of again, stabilized coins such as Tether have the ability to stop risks in their tracks by freezing the addresses of wrongdoers.
If you’re new to this area, you may be wondering what it means to be a stablecoin. A stablecoin is a digital currency that is pegged to a “stable” reserve asset like the U.S. dollar or gold. Stablecoins are designed to reduce volatility relative to unpegged cryptocurrencies like Bitcoin. Thus, when Tether froze nearly a million dollars in a single user account, thinking about the action in the most simplistic of forms, it would be one of the most successful ways in either centralized or decentralized finance for an overseeing institution to step in and protect funds from being dispersed to the bad guys. Through the freezing of addresses, Tether has been able to help recover funds stolen by hackers, funds under investigation, or compromised.
Tether, and other stablecoins, routinely assist law enforcement in investigations and has assisted in the recovery of tens of millions of stolen dollars. This unique ability to recover funds as opposed to more traditional financial institutions is something we in the AML community will continue to watch eagerly and excitedly. Cryptocurrency and decentralized finance is here to stay and may actually pose a higher success and recover rate of illicit funds than our current traditional systems. With its eye to compliance and sustainability, decentralized finance is moving quickly in developing creative and unique ways to protect funds from potential fraudsters and other bad actors.
Tether began banning blockchain addresses in 2017 and has blocked over 500 addresses to date on Ethereum, according to The Block’s Data Dashboard. Tether also has a “recovery” mechanism in place, meaning it can freeze USDT and reissue them in certain cases. For example, if a user sends USDT to the wrong address, it can help recover it by freezing the USDT sent to the wrong address and reissuing new USDT to the user.
However, in this latest seven figure freeze, the funds remain in the frozen address. Such cases usually mean that a frozen address is under dispute or being investigated by a law enforcement agency.