Stablecoin issuers have frozen billions of dollars in cryptocurrency stolen by North Korean hacking groups, drawing attention to how much control issuers hold over assets. Even for assets traded on a blockchain, an issuer can block funds from moving out of a specific wallet. The capability is effective at cutting off criminal proceeds, but some warn that excessive issuer authority could infringe on users' property rights.
Legal disputes over asset freezes by stablecoin issuers are mounting, according to blockchain industry sources on the 7th. The cases include not only suits alleging that funds were frozen improperly but also suits claiming that losses grew because stolen assets were not frozen quickly enough. At issue is when an issuer should block transfers and how far its liability extends for that judgment.
The freeze function demonstrated its force in the recent Binance hack. About $6.36 billion in cryptocurrency was stolen in the Oct. 29 breach, according to blockchain analytics firm TRM Labs. Immediately afterward, dollar stablecoin issuers including Tether and Circle froze about $2.67 billion in stablecoins. Including measures taken at the blockchain network level, the total reached about $2.7 billion, or 42% of the entire amount stolen.
Issuers were able to lock up the funds because stablecoins include a feature that blocks transactions from designated wallets. Stablecoins held in a user's personal wallet are no exception. Using authority built into the smart contract, an issuer can bar a specific address from sending or receiving tokens. It does not need to obtain the private key, the equivalent of a wallet password. Even when a blockchain network is decentralized, the stablecoins circulating on it are not free from issuer control.
Freeze conditions are set by each issuer. Tether, which issues USDT, states in its official terms that it may freeze tokens not only when required by law but also when it determines on its own that doing so is necessary. The terms also allow the company to block a specific wallet address if it suspects illegal activity or concludes the terms have been violated.
Circle, the issuer of USDC, also operates a transaction-blocking policy. It may block a specific address not only when it must comply with laws or valid legal orders but also to respond to urgent government requests or threats to the safety of the stablecoin network. Ripple likewise provides in its RLUSD terms of use that it may freeze wallets under applicable law or internal compliance policy.
The problem is that while issuers can decide on their own whether to freeze assets, the legal standard for how far that authority extends is unclear. Overseas, lawsuits are piling up that contest not only whether a freeze was justified but also whether an issuer is liable for failing to freeze funds.
Conduit, a cross-border payments company, filed suit against Tether in the U.S. District Court for the Southern District of New York in October. It said Tether froze about $2.76 million in USDT the company held as operating funds and did not release it for more than a year. Conduit argued that Brazilian police had never designated the wallet for freezing and that the company itself was not under investigation. In August, two Thai nationals sued Tether seeking release of about $42.42 million in frozen USDT. The plaintiffs argued that Tether froze the funds last October without a court seizure warrant.
Conversely, suits have also been filed seeking to hold issuers liable for not freezing funds. In April, investors hurt by a hack of the decentralized finance platform Drift Protocol filed a class action alleging that Circle failed to promptly freeze the stolen USDC. They argued that Circle had the technical authority to block the assets from moving but did not respond appropriately. Circle said its policy is to freeze assets at the direction of law enforcement or courts, and that it is dangerous for a private company to determine on its own who owns an asset or whether a crime has occurred.
These overseas disputes carry implications for South Korea, which is moving to establish a legal framework for won-denominated stablecoins. In an anti-money-laundering work plan released in February, the Korea Financial Intelligence Unit proposed requiring stablecoins to be equipped with freeze and burn functions from the issuance stage. The aim is to swiftly halt movement of assets exploited for money laundering. But granting issuers the technical authority to freeze funds does not by itself resolve when that authority should be exercised or who bears responsibility for a wrong judgment.
In the United States, the GENIUS Act, a stablecoin regulation law taking effect next year, spells out an obligation to freeze and burn assets under lawful orders. Issuers must have the technical capability to carry out such orders and must comply with them. Orders are to be issued by a court of competent jurisdiction or an authorized federal agency and must specifically identify the assets or accounts involved.
"Cutting off criminal funds quickly matters, but the law needs to clearly define on what grounds an issuer may freeze assets and who bears responsibility for an improper freeze," an industry official said.
Original reporting by Do Ye-ri for Seoul Economic Daily.
AI-translated from Korean. Quotes from foreign sources are based on Korean-language reports and may not reflect exact original wording.
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