Tether froze more than $1 million in USDT in a private digital wallet last week, effectively rendering it unusable.

Etherscan, an Ethereum block explorer, revealed that the No. 1 stablecoin issuer froze the 1.09 million USDT on December 30.

A Tether spokesperson told The Block that the action was taken at the request of an unspecified regulator or law enforcement agency. While the company declined to comment on the specific case, it did say that by "freezing of addresses, Tether has been able to help recover funds stolen by hackers or are compromised."

The move highlights a major issue that many in the crypto community, particularly privacy advocates, see as a major issue with stablecoins

Stablecoins, unlike traditional cryptocurrencies such as bitcoin, can be frozen in the same way that funds in a bank account can.

It's one of the reasons proponents of decentralised finance advocate for the use of DeFi stablecoins like Maker's DAI, which are not controlled by a centralised authority that could freeze cryptocurrency.

Tether is not the only stablecoin provider who does this.

Grant Thornton, a top 10 global auditing firm, noted in its audit of USD Coin issuer Circle Internet Financial's cash reserves on Sept. 20 that it "has the ability to block individual USDC public blockchain addresses from sending and receiving USDC." This ability is known as 'blacklisting.'

When an address is blacklisted, it is no longer able to receive USDC, and all USDC controlled by that address is frozen and cannot be transferred on-chain. Individual USDC tokens cannot be blacklisted."

At the time of the audit, there were 100,000 blacklisted USDC tokens in circulation.

Binance USD, the third most valuable stablecoin, is not freezable, according to Binance CEO Changpeng "CZ" Zhao in a tweet on August 10, 2021, following the $612 million Poly Network hack.

"While we cannot freeze funds on blockchains, if those funds arrive on our Binance exchange, we will try to freeze them," he said. "As a result, we'll be doing a lot of blockchain analysis." Nothing is simple. We make an effort."

Helping the authorities

Freezing stablecoins may be controversial, but it is a significant benefit in the eyes of regulators and law enforcement agencies, who have been stepping up their efforts and capabilities in tracking down cryptocurrencies used in illegal activities ranging from ransomware to dark market drug sales and even terrorism funding.

You might be interested in: The Department of Justice Establishes a National Cryptocurrency Enforcement Team.

Tether CTO Paolo Ardoino made this point on Twitter last year, following the hacking of the Yearn.finance decentralised finance (DeFi) protocol in February.

Tether immediately froze 1.7 million USDC tokens. Ardoino defended the move on February 6, stating that USDC is a centralised stablecoin and that "among Tether duties is the responsibility of acting and collaborating with law enforcement and regulators regarding potential dangerous behaviour."

It's also sound political strategy. During the Senate Banking Committee's stablecoin hearing on December 14, Sen. Elizabeth Warren proposed prohibiting US banks from holding the cash assets used to back stablecoins and protect the dollar's peg, and she gave an open floor to a witness who called for an outright ban.

Many of the US-based exchanges attempting to stay on the good side of regulators, such as Coinbase, Kraken, Gemini, and FTX.US, routinely freeze funds in the same way that any bank or brokerage would. In fact, many non-US exchanges do so for reasons unrelated to 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 vigorously oppose unreasonable law enforcement and regulatory requests for customer information, with Coinbase Chief Legal Officer Paul Grewal saying in a transparency report published on December 15 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."

Grewal, on the other hand, stated that "protecting our customers' financial privacy is a fundamental part of our commitment to being the most trusted place to engage with cryptocurrency."

His stance suggests a compelling reason why regulators would prefer to deal with stablecoin issuers. It's much easier to deal with a few stablecoin issuers than dozens of exchanges.

On the other hand, when companies like Tether and Circle freeze their stablecoins, it only prevents bad actors from profiting. When exchanges freeze the cryptocurrency in their wallets, the rightful owner can retrieve it.

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