Can StableCoin address of a CryptoCurrency exchange be frozen?

[DutchDemon]

Many CryptoCurrency exchanges now support StableCoins. But, lately many StableCoin addresses are being frozen by issuing authority. I would like to know, can they freeze StableCoin addresses of exchanges as well, e.g. Binance or BitMex, i.e. exchanges that allow non-KYC trading? If yes, how will exchanges deal with such cases and who will bear the loss? Because, the user who deposited those tainted StableCoins to the exchange, may just convert it to BTC and already withdraw before it is frozen.

Ref 1: https://www.coindesk.com/circle-confirms-freezing-100k-in-usdc-at-law-enforcements-request

Ref 2: https://tokenpost.com/Tether-freezes-40-addresses-containing-millions-in-USDT-5623

Ref 3: https://thenextweb.com/hardfork/2018/09/20/stablecoin-backdoor-law-enforcement/

Update: Many seems to have misunderstood my question. My question is from exchange's perspective. I am explaining it below...

Let's say User U has deposited S StableCoin in Exchange E without KYC. U then converts S to Bitcoin B and withdraws from E. E moves deposited S to its cold storage with more S. Now, issuing authority of S gets a court order that U deposited stolen fund to E, which is now sitting in E's cold storage of S. So, issuing authority freezes the cold storage. Not only the stolen fund is frozen, but also the whole cold storage worth over million dollar is now locked. In this scenario, what would E do?

[jackg]

1. Yeah they can still be frozen. This is the reason why using stable coins is stupid if they're going to freeze them.
2. Who gets the $? The stable coin issuer - you're essentially paying for someone to give you nothing
3. Are the exchanges ever compensated, is a random bystander who accepts the coins compensated? If not then there's your answer - I doubt it though..

Losses will be passed onto the users. Exchanges light attempt to absorb the losses but I imagine if funds of the depositor of the stable coin are still on the exchange then they'll be liquidated to cover the cost. If not the exchange will probably just gamble with the prospect that therell be enough stable coins that aren't cashed out on the exchange that they can dip into.

[Bitcoin_Arena]

That's why there are limits to non KYC trades and withdraws, to avoid huge loses in case things go south. On top of that, most the exchanges do some checks of any suspicious activities before they can confirm a withdrawal.

If the transactions from the tinted address are within the radar, they will immediately block your account and start asking for KYC.

[mk4]

Guess what, even stablecoins(besides DAI/SAI) on YOUR OWN non-custodial wallet can be frozen. It's that alarming.

Topic: [UPDATED] PSA: Most Stablecoins Can Be Frozen, Even in Your Own Wallets https://bitcointalk.org/index.php?topic=5204055

[pooya87]

it depends on how you define "being frozen" (since you mention exchanges).

when you deposit some coins (whether it is stablecoin or anything else including bitcoin) to an address provided to you by an exchange you do not own that address, you only own an account and the exchange owns the address while letting you access a number in their database representing how much you deposited.
obviously they can freeze your "account" if you deposit coins that they don't like. this affects everything from bitcoin to stablecoins, tokens, shitcoins,...

but when you send coins to an address that you and you alone control (created the private key locally and store it that way) then whether it could be frozen or not depends on whether the coin is centralized or not. for example nobody can ever freeze bitcoin coins. but when the coins are centralized, they are like accounts (exchange account or a bank account) and the centralized authority can easily freeze them or even move the coins.
all stablecoins that i have seen so far (that are in use and are stable) are centralized.

[20kevin20]

Most stablecoins (if not all) are centralized, which means someone has control over them. So if you're using a centralized stablecoin and deposit coins to an address that is under your control, your coins could always be taken away from you. If you are going to deposit coins to a centralized stablecoin address on a centralized exchange, it's a double-risk: you risk both the exchange and the stablecoin governance to decide seizing your funds. So yes, storing your bucks in some stablecoins is a bad idea.

[SquirrelJulietGarden]

Stable coins are centralized so they can be frozen by stable coin issuers themselves or indirectly by law enforcements from governments.

Centralization means risk of sudden freeze, shutdown, etc.

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

[joniboini]

Whlie they can do that I doubt they'll do it carelessly. Especially if the exchanges in questions are those who are in top spots like Binance, Coinbase, etc. You'll probably enter a lawsuit saga and instead of losing millions, they'd rather work together with those exchanges to block the suspicious individual(s) who uses the address.

[Shimmiry]

Since there are a central authority on most of stablecoins and exchanges, it will be really easy for them to hold or to freeze your account. 

If yes, how will exchanges deal with such cases and who will bear the loss? Because, the user who deposited those tainted StableCoins to the exchange, may just convert it to BTC and already withdraw before it is frozen.

If the user who had deposited an stable coin to an exchage, and he does not converted it on other cryptos such as bitcoin before they they become frozen, then he will be the one who will bear the loss.
Just like what other's mentioned above, if there is a risk of some stablecoins to be frozen, then why would you still use them.

[DutchDemon]

Guess what, even stablecoins(besides DAI/SAI) on YOUR OWN non-custodial wallet can be frozen. It's that alarming.

Topic: [UPDATED] PSA: Most Stablecoins Can Be Frozen, Even in Your Own Wallets https://bitcointalk.org/index.php?topic=5204055

it depends on how you define "being frozen" (since you mention exchanges).

when you deposit some coins (whether it is stablecoin or anything else including bitcoin) to an address provided to you by an exchange you do not own that address, you only own an account and the exchange owns the address while letting you access a number in their database representing how much you deposited.
obviously they can freeze your "account" if you deposit coins that they don't like. this affects everything from bitcoin to stablecoins, tokens, shitcoins,...

but when you send coins to an address that you and you alone control (created the private key locally and store it that way) then whether it could be frozen or not depends on whether the coin is centralized or not. for example nobody can ever freeze bitcoin coins. but when the coins are centralized, they are like accounts (exchange account or a bank account) and the centralized authority can easily freeze them or even move the coins.
all stablecoins that i have seen so far (that are in use and are stable) are centralized.

It seems most of you have not understood my question. I am well aware of the fact that StableCoins can be frozen. Whether an exchange can freeze my coins or not is not what I am asking. My question is from the perspective of an exchange. What an exchange would do, if their StableCoin cold wallet is frozen by that StableCoin issuing authority, if the user, whose fund is in question, did not do KYC and withdrew his fund out through other coins, say Bitcoin?

To elaborate the scenario, let's say User U has deposited S StableCoin in Exchange E without KYC. U then converts S to Bitcoin B and withdraws from E. E moves deposited S to its cold storage with more S. Now, issuing authority of S gets a court order that U deposited stolen fund to E, which is now sitting in E's cold storage of S. So, issuing authority freezes the cold storage. Not only the stolen fund is frozen, but also the whole cold storage worth over million dollar is now locked. In this scenario, what would E do?

[DdmrDdmr]

<…>

It’s not very likely at all that an Exchange’s cold wallet(s) would be frozen by authorities, unless the Exchange itself is doing something extremely dodgy.

The case example you place has no chances of happening really. If a particular account does something dodgy, and authorities require the Exchange to seize his funds, they seize them at the person’s account logical level on the Exchange. Since all assets anyone has on a centralized Exchange are virtual (not your keys, not your crypto), it’s the Exchange’s inner software that states who’s got what, regardless of how the Exchange stores the assets themselves.

[DutchDemon]

The case example you place has no chances of happening really. If a particular account does something dodgy, and authorities require the Exchange to seize his funds, they seize them at the person’s account logical level on the Exchange.

In the hypothetical scenario stated above, user has already withdrawn his fund from exchange, after converting it to Bitcoin.

U then converts S to Bitcoin B and withdraws from E.

So, freezing user's empty account is of no use. Also, as per the news links given in OP, authority did not care who own the address. They just froze it first out of the blue. Hence, I wonder, why the case sample I placed has no chances of happening in reality?

[DdmrDdmr]

<…>

In the case scenario, I don’t see how the court order can pinpoint an exact address in custody by the Exchange itself. User U is chased, and therefore his logical account on the Exchange is pursuable, but the inner distribution on customer assets to addresses (possibly and n:m relation) is not known (but to the Exchange themselves), and if the Exchanges Stablecoins are distributed over 100 addresses (cold storage and not), then how can the court order pinpoint an exact address that is being managed by the Exchange, but where user U had ties to?

In any case, I don’t know what the Exchange would do, but it is at least morally responsible for the assets they have in custody, and the same as when a hack takes place they should try to reposition the customer balances at their own expense (when feasible, and the Exchange survives the hit), so would it seemingly apply here. A court order, eventually, will likely not penalize a whole collective for a single case on a shared custodial address. A Centralized Stablecoin issuer might.

[Harlot]

Regardless if it is Stablecoins or normal cryptocurrencies Exchanges can be frozen with the power of court orders signed by judges or SEC issuing them a direct order to do so. Yeah I know some Stablecoins have the power to freeze your address but all of this are useless as we are talking about legally operating exchanges here and they are also under the government's power. The only time this will be useful I think is for crypto exchanges where they are running illegally without any license, this will be handy for them.

[DutchDemon]

<…>

In the case scenario, I don’t see how the court order can pinpoint an exact address in custody by the Exchange itself. User U is chased, and therefore his logical account on the Exchange is pursuable, but the inner distribution on customer assets to addresses (possibly and n:m relation) is not known (but to the Exchange themselves), and if the Exchanges Stablecoins are distributed over 100 addresses (cold storage and not), then how can the court order pinpoint an exact address that is being managed by the Exchange, but where user U had ties to?

In any case, I don’t know what the Exchange would do, but it is at least morally responsible for the assets they have in custody, and the same as when a hack takes place they should try to reposition the customer balances at their own expense (when feasible, and the Exchange survives the hit), so would it seemingly apply here. A court order, eventually, will likely not penalize a whole collective for a single case on a shared custodial address. A Centralized Stablecoin issuer might.

You are talking about how court order would pass. But, court order will come to the Stable Coin issuer, not the exchange in question. Stable Coin issuer does not even need to know whether the address belong to an user or an exchange. They have the code to freeze any fund on any address. So, if they're served a legal notice that their Stable Coin is being used for illegal purpose and they find that 5k USD worth Stable Coin has reached an address having 5m USD worth Stable Coin, they can just freeze it. Right? In fact, none of the news of Stable Coin freezing do mention any sort of Court Order served to the address owner. So, as the affected end user, what an exchange owner can do, if the cold storage address is frozen?

[libert19]

I'm sorry but I don't quite get your question, if on exchange your whole account can get frozen, so all assets held there are automatically included and as previously mentioned some stable coins can be freezed inside your own wallets as well.

[The Cryptovator]

If I understand correctly you are talking about the cold store of exchange. Because when a user makes deposit fund into exchanges then they moved the transaction into their cold store automatically. Technically still author of the stable coin could freeze the address. But I think an exchange will not accept it easily and they would take legal action. I believe before they accept stable coin exchange have to contact the stable coin authority. Otherwise, they shouldn't take such a risk.

[pakhitheboss]

If I understand correctly you are talking about the cold store of exchange. Because when a user makes deposit fund into exchanges then they moved the transaction into their cold store automatically. Technically still author of the stable coin could freeze the address. But I think an exchange will not accept it easily and they would take legal action. I believe before they accept stable coin exchange have to contact the stable coin authority. Otherwise, they shouldn't take such a risk.

I believe authorities can still freeze any exchange wallet if illegal activity is reported regardless on the pertext of investigation. Exchange can dispute or deny the request to freeze any wallet but generally they do not as they do not want to complicate their lives. 

[jademaxsuy]

I believe authorities can still freeze any exchange wallet if illegal activity is reported regardless on the pertext of investigation. Exchange can dispute or deny the request to freeze any wallet but generally they do not as they do not want to complicate their lives. 

Authorities can do it because their influence especially in enforcing the law covers to all of which the interest of the authority is to protect the community. If there are legal complains regarding to the accounts and since exchange especially centralized exchange who were under the rules and regulations of the government agency from their permit to operate will likely to freeze even not the stable coins or other crypto as well could be possible. That if funds is already in the exchange but if it is in the wallet of the user then I do not have the idea if it is still can be freeze.

Can anyone answer if the wallet could be freeze (like one could not transfer funds) by the developer of that wallet if the authority will ask especially if it is a hardware wallet like electrum?

[mk4]

Can anyone answer if the wallet could be freeze (like one could not transfer funds) by the developer of that wallet if the authority will ask especially if it is a hardware wallet like electrum?

It's not necessarily due to the wallet, but the stablecoin projects themselves(besides DAI/SAI) has an option for the developers to lock up stablecoins even in your own non-custodial wallet. I created a thread specifically about this last year: https://bitcointalk.org/index.php?topic=5204055

And no, Electrum is not a hardware wallet.