[UPDATED] PSA: Most Stablecoins Can Be Frozen, Even in Your Own Wallets

[mk4]

Posted on the Beginners & Help section instead of the Trading Discussion section as for this to hopefully be seen by some people who hold stablecoins for longer amounts of time.

EDIT: Alright. Unexpectedly ended up being quite a slightly long write-up. When I first started writing this I thought it was only going to be a few sentences long. Trust me though, this is quite important information.


EDIT #2 (July 9, 2020): Let's just say, I told you so?

Article: https://www.coindesk.com/circle-confirms-freezing-100k-in-usdc-at-law-enforcements-request


I've been wanting to do a quick post here on Bitcointalk a month ago about this, but I lack information on other stablecoins besides Tether(USDT) so I delayed and delayed and delayed the posting further. Thankfully, and coincidentally, someone made a good Medium post about this just days ago, with the chart below.

This might be common knowledge for some, but I'm going to assume that a good number of people still doesn't know this yet. But most stablecoins can be freezed. Yes, even on your wallets. People might think that just because they're holding a certain cryptocurrency stablecoin on their non-custodial wallet, that they're already unseizable.

Well, that's unfortunately really not the case.

Here's a quote from the article:

Asset freeze
In order to remain compliant with regulators, many stablecoin issuers have introduced blacklists so that they can freeze the stablecoins held at specific addresses. This ability is also particular useful in the case of hacks, but it means that the trust we must place in the issuer to not act maliciously is that much greater.

Link to article

While as far as I know(correct me if I'm wrong) we haven't read anything anywhere about a certain crypto person's stablecoins getting freezed(besides the ones in the linked article), it's really not impossible from happening. It just might be the matter of 'when' we're going to see someone get their stablecoin funds frozen.

Table from the same Medium article

Increased regulations

It really won't be surprising if the government of whatever country(not only in the United States) sometime in the future began to crack down and become A LOT more stricter when it comes to bitcoin and cryptocurrencies in general. Is it possible for the government to ask these centralized entities to freeze the stablecoin funds of certain(or all) holders and demand KYC/AML information? Definitely really really possible(in my opinion at least). In fact, I think that there's a high likelihood of this happening sometime in the future.

Single Collateral DAI(SAI) and Multi-Collateral DAI(DAI)

Besides USDT on the Liquid network(which isn't really THAT accessible right now, hopefully in the future), the DAI/SAI stablecoin, which is both from the MakerDAO project, are the only stablecoins on the list that's unfreezable as you may see. It's definitely a very interesting project and is working fine at the moment; but remember that it's FAR from perfect. In fact, not even close. While historically, in it's almost 2 years of existence, it's value stayed really close to $1, which is good, but there were times that it's price pumped to $1.06 and as low as $0.95, which is definitely something that you wouldn't want in a stablecoin.

Also, not because DAI/SAI are unfreezable right now, it doesn't automatically mean that it will be like this forever. Remember, there's still a single core team working on this project, and they can easily change the code today if they wanted or needed to. Not because they're bad people per se, but they might need to comply to government's requirements sometime in the future.

Source: https://coinmarketcap.com/currencies/single-collateral-dai/

Final thoughts

I'm not saying that you should hold stablecoins, but I think that people just need to be more aware of the risks they're taking when holding completely centralized stablecoins and sort of "semi-decentralized" stablecoins. Remember, while "semi-decentralized" stablecoins might be the right choice, remember that black swan events can really cause it to have it's price either rise or crash. So if possible, it'd probably be a better idea to hold actual non-crypto USD. Use this information for your own benefit, Bitcointalk peeps. In the end, what you hold still completely depends on you. If something happened sometime in the future, don't say I didn't warn ya.  


EDIT: Just to add more information:

The most notable refusals for redemptions have been Gemini and Paxos and in both cases it seems it was at least partly to - “maximize their status on CoinMarketCap.”

https://www.coindesk.com/winklevoss-crypto-gemini-gusd-stablecoin-redemption

https://www.ccn.com/paxos-standard-hassling-ethereum-traders-trying-to-redeem-stablecoin-pax-for-dollars/

Would you want your wealth tied up in something worried about how it looks on some piece of shit website?

When you consider how anal they are about conventional banking the anality will go up by an order of magnitude when it's their 'own' money.

[1714004612]

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[Upgrade00]

The possibility of your assets getting frozen is quite unsettling for holders of any currency and shows how centralized such coins really are. They primarily function as fiat currencies which are run in the blockchain and adhere strictly to all regulatory laws.
An article I found also claimed that some addresses have actually been frozen holding assets of about $41 million

The blog also said that while blacklist functionality exists for most stablecoins, “we can only find it having been used on USDT for 16 different addresses.” The study noted 7 frozen addresses for USDT–Bitcoin which accounted for $39,404,629 and 8 of the frozen addresses for USDT-Ethereum worth $1,959,156.10.

The exact reason as to why these funds were frozen was unclear

And the exact reason for the freeze was not made public. In my opinion the demerits of stable coins outweigh the merits.

[mk4]

The possibility of your assets getting frozen is quite unsettling for holders of any currency and shows how centralized such coins really are.

Definitely really really unsettling, and knowing the marketcap of Tether(USDT) alone, which is currently at 4.1 billion USD, I'm afraid majority of people don't know the fact that the funds can be freezed, heck, I don't even think that most people know the shadiness of Tether!

[mersal]

I didn't know that stable coin could be froze by the team itself, thanks for the great information.

This will convince the traders to stop holding USDT or other stable coins which has high volume at the moment?

I always suggested to use stable coins to cashout profits from trading and convert them back into decentralized coins sooner after the trend changes on prices but its definitely not a coin to hold on wallets.

[Pmalek]

I didn't know about the freezing options so thank you for creating this thread. Although I don't usually hold my assets in stablecoins it is good to know.
So for those who need stablecoins it's better to invest in DAI or Tether only on the Liquid platform.

The value of DAI varies. It's normal. I remember reading about DAI a long time ago. When the value of DAI is above $1 there is an incentive to create more DAI, sell it and make a profit. This will then lower the price to the $1 region. When the price is below $1 they do the contrary, they buy more DAI which increases the price. 

[pooya87]

I didn't know about the freezing options so thank you for creating this thread.

when something is centralized, you must assume that it already has that option or an option similar to that. in short "being centralized" means a third party having full control of the system and you are a simple user of that system they control. and that doesn't stop at stable coins, it will be true about any centralized coin (eg. XRP) or service (eg. centralized exchanges).

unfortunately since nothing horrible has happened yet, people tend to have a false sense of security about stable coins and end up using them in the wrong way such as storing!

[mk4]

This will convince the traders to stop holding USDT or other stable coins which has high volume at the moment?

I always suggested to use stable coins to cashout profits from trading and convert them back into decentralized coins sooner after the trend changes on prices but its definitely not a coin to hold on wallets.

Ehh, I really don't think it will convince traders in general. It's going to take so much effort to get these kinds of information out there even though it's completely necessary for everyone to know this.

As for day trading, I have no problems with it. You're most likely going to completely be fine as long as you don't hold it for too long. I hold stablecoins for a week in maximum most of the time.

unfortunately since nothing horrible has happened yet, people tend to have a false sense of security about stable coins and end up using them in the wrong way such as storing!

Ah yes. The typical "it hasn't been hacked" reasoning. The same exact thing people said in the past with MtGox and with Bitfinex.

[acdc]

So far, I've always thought that stablecoins are always anonymous and their owners have full control over them, this is one of my misguided knowledge.
I usually hide my assets in USDT when the market is in a slump, although everything is fine up to now but maybe I should pay more attention to stablecoin holdings.

[hatshepsut93]

There's a lot more risks with stablecoins, and they all stem from their centralization.
The company can be closed by the government if they feel like it doesn't fully comply with regulations, or if they think it threatens their control over the economy.
The company that manages the stablecoin can execute an exit scam or just fail for countless reasons, and the holders will end up with worthless tokens.
The underlying fiat currency can fall in value.
The company can stop their operations in certain countries and freeze the coins of individuals from those countries.
The company can get hacked and attackers may steal coins, customer data or cause other damage.

[LbtalkL]

Thanks for your post I didn't know until now that those stablecoins has the ability to froze our funds except DAI. It really feels uncomfortable and unsafe holding these stablecoins if it's really true. I will be reading the medium post and look for its basis or source. But I guess it is still safe if you are using it on exchanges for trading. Lools like DAI is a better choice in terms of stablecoins.

[BitcoinsGreat]

Thanks for your post I didn't know until now that those stablecoins has the ability to froze our funds except DAI. It really feels uncomfortable and unsafe holding these stablecoins if it's really true. I will be reading the medium post and look for its basis or source. But I guess it is still safe if you are using it on exchanges for trading. Lools like DAI is a better choice in terms of stablecoins.

A coin is stable because it is controlled by some authority. You might have heard the tether fud few month back and it was not fully backed by USD. You can trade with these stable coins but never keep your funds in them for long time. If you cannot keep your funds in Bitcoin and want to keep them in USD, go for the fiat which is more reliable than these coins.

[mk4]

Lools like DAI is a better choice in terms of stablecoins.

Well, yea. It's really debatable. It's pretty much the risks of funds being frozen(centralized stablecoins) versus the price instability and the no guarantee of 1:1 peg(DAI/SAI). It mostly depends on what risk you're willing to take. Personally in the short short term, I'd go with centralized stablecoins like TUSD(because Tether is just too shady). But long term, I'd hold fiat and not neither. I'm still just not 100% convinced with DAI/SAI.

[BrewMaster]

Personally in the short short term, I'd go with centralized stablecoins like TUSD(because Tether is just too shady).

one of the problems with these other stable coins is their lack of liquidity and sometimes adoption by exchanges. since one of the usages of the stable coins is for moving funds between exchanges, using Tether is the only option in most cases since the other exchange may not even have anything else. so eventually everyone sticks with the shady option.

[evgenia_volkova]

I think only those funds are freezed which are suspected that they are involved in hack or illegal activity. Not sure, but your article hits the brain hard.

Stable coins are the safe one during sudden bear or bull market now need to think on 

[malevolent]

Stablecoins are a slightly better option than holding fiat on an exchange (assuming one stores them on a hardware wallet), since no one can socially engineer an exchange to perform an account takeover, but it still requires the holder to trust the entities behind them not to go down, not to freeze the stablecoins for spurious reasons, and that it will be possible to exchange them back into BTC or fiat without new requirements (stringent or more onerous KYC, etc.) being introduced in the future.

The fact that they can be stored on a hardware wallet may lull some newbies into a false sense of security, so watch out.

[Harlot]

I was thinking before that stablecoins can somehow become a safe haven when a bloodbath happens in the market and it can be a good alternative then just converting your coins directly to fiat. But given that they have an "asset freeze" capability and on this scenario where such a bloodbath happens then it is much more scarier to hold stablecoins when they can freeze your crypto at any given time. What if you are trying to cash out your USDT because it is now being affected by the market or it suddenly going down then Tether suddenly decides to freeze everyone's wallet then you are basically screwed.

[enhu]

By freezing means the government will force these centralize entity to edit the smart contracts of these stablecoins?

I wonder what could be done to unfreeze too. Because if it happens that you just converted all your BTC to stablecoin since the prices started to crumble but only to see yourself without funds anymore because the thousands you got are immovable.

[o_e_l_e_o]

-snip-

Don't forget the biggest risk of all, which is that of insufficient collateral. We know for a fact that Tether isn't backed up anywhere close to 1-to-1 as they claim, and the fraction of it that is backed up is backed up with a variety of non-cash assets, including assets which don't even exist yet such as interest payments on a loan they made to themselves. Totally not shady.

By freezing means the government will force these centralize entity to edit the smart contracts of these stablecoins?

It usually means that somewhere within the smart contract or code for these stablecoins there already exists a mechanism which allows the centralized entity controlling it to freeze coins or addresses at will.

[LTU_btc]

I always been sceptical about stablecoins and I never hold any of these. There is quite many reasons like liquidity, centralization and etc why I don't like it, but I didn't knew that funds can be frozen. So, thank you for posting this stuff. But maybe this thing doesn't looks like something unexpected, because it's centralized cryptocurrency and I don't have any trust in it.
But seeing how big Tether marketcap is, it's worrying thing. Imagine them colapsing one day...

[mk4]

one of the problems with these other stable coins is their lack of liquidity and sometimes adoption by exchanges. since one of the usages of the stable coins is for moving funds between exchanges, using Tether is the only option in most cases since the other exchange may not even have anything else. so eventually everyone sticks with the shady option.

True. The next stablecoin with the highest liquidity next to USDT($6.1b volume) is USDC($30m volume). While USDC's volume is far less than USDT's, it's really not THAT bad. As long as you're trading with USDC:bitcoin and not some altcoin(probably besides ETH), you will probably be fine unless you do a huge transaction.

I think only those funds are freezed which are suspected that they are involved in hack or illegal activity. Not sure, but your article hits the brain hard.

Well, that might just be what they claim. I'm not going to conclude that all these centralized companies that control these centralized stablecoins are evil, but even if they're not, they will have no choice but to obey if the government asks them to do things like freeze funds for whatever reason.