Stablecoin protection: regulation, risks, phishing

Introduction

With the tightening of stablecoin regulations, the risks of asset freezes and targeted phishing are increasing. This article is a practical guide for cryptocurrency holders with basic skills in using non-custodial wallets (e.g., MetaMask). You will learn how to conduct a technical audit of stablecoin smart contracts (USDC, USDT), assess the risks of bridges and centralized platforms, and build a protection system for assets of any volume. We will break down contract analysis, secure storage, operational security, and emergency action plans step-by-step.

Article Limitations and Legal Disclaimer

The article is current as of the second half of 2024 and covers general principles applicable in US and EU jurisdictions (based on the Clarity for Payment Stablecoins Act and MiCA initiatives). The regulatory environment changes rapidly, so always check local legislation. This material does not constitute financial or legal advice. In case of issues, it is strongly recommended to consult a qualified lawyer.

Key Definitions

• Centralized Stablecoin (USDC, USDT) — a token issued and controlled by a single entity (issuer) responsible for its reserves and regulatory compliance.
• Decentralized Stablecoin (DAI) — a token managed by smart contracts and a DAO. There are no risks of centralized blocking, but risks of code vulnerabilities exist.
• Issuer — the company issuing the stablecoin (e.g., Circle for USDC, Tether for USDT).
• Pause (pause) / Blacklist (blacklist) — functions in a smart contract that allow the issuer to stop all token transfers or block operations for specific addresses.
• Approval (approval) — granting a smart contract the right to spend tokens from your wallet. This is a standard operation for DeFi, but it creates risks if the contract is vulnerable.

Legislative Background and Its Impact

Key regulatory initiatives require stablecoin issuers to comply with Anti-Money Laundering (AML) requirements and cooperate with law enforcement. This means that transactions are monitored, and addresses noticed in illegal activities or violating sanction regimes (e.g., OFAC Sanctions Search lists) can be blocked. Blocking policies are published on issuer websites (e.g., Circle).

Practical Guide to Asset Protection

Step 1. Technical Audit of the Smart Contract

Before using a stablecoin, it is necessary to analyze its smart contract for centralized control mechanisms.

1. Checking for Blocking and Pause Functions

• Instructions:

  1. Find the stablecoin contract address on the official website or CoinGecko and open it in a blockchain explorer (e.g., USDC on Etherscan).
  2. Ensure the code is verified (green checkmark on the "Contract" tab). Unverified code is a critical risk.
  3. On the "Code" tab, use the search function (Ctrl+F) to find keywords indicating control functions.

• What to look for (functions, events, modifiers):

  • pause, unpause, paused, whenNotPaused — the ability to completely stop all operations with the token.
  • blacklist, isBlacklisted, freezeAccount, setBlacklist — the ability to block individual addresses.
  • approve, transferFrom — standard functions, but their calls should be monitored.
  • RoleGranted, OwnershipTransferred — events signaling a change in administrative roles. These can be found in the "Logs" tab.

2. Analysis of the Ownership and Governance Model

It is important to understand who controls the contract: a single person (EOA) or a decentralized structure (multisig).

• How to check the owner type (owner):

  1. On the Etherscan contract page, go to the Contract → Read Contract (or Read as Proxy) tab.
  2. Find the owner() or admin() functions. Enter them into the field and click "Query."
  3. Copy the resulting address and paste it into the Etherscan search bar.

• Assess the risk:

  • High risk: The owner is a regular address (EOA) without a "Contract" label. This means one person with access to the private key can manage the entire contract.
  • Reduced risk: The owner is a contract labeled "Gnosis Safe: Proxy" or "Multisig." This is a multisig wallet requiring several signatures to perform actions. An additional plus is the presence of a timelock (a time delay before transaction execution).

3. Checking for Upgradability (Proxy Contracts)

Most stablecoins use proxy contracts, allowing the issuer to update the token logic without changing its address. This creates a risk of malicious code injection.

• How to check:

  1. On the Etherscan contract page, find the Contract tab. If you see two tabs (Read as Proxy and Write as Proxy), it is a proxy contract.
  2. Go to the Read as Proxy tab. Find the implementation (logic) address according to the EIP-1967 standard. It is usually stored in special storage slots. Etherscan often provides a direct link to the "implementation contract."
  3. In the proxy contract code (not the implementation), look for upgradeTo, upgradeToAndCall functions. These confirm the possibility of an update.
  4. Analyze the administrator address (admin) that has the right to call these functions, as described in point 2.

• Documentation for study: OpenZeppelin Upgrades Guide.

Step 2. Assessing Bridge Risks

When transferring a stablecoin to another network, you use a bridge, which becomes a new point of risk.

• Bridge Verification Checklist:
  • Operator Type: Custodial (funds are held by the operator) or decentralized (trustless, based on smart contracts)?
  • Operator Security: If the bridge is managed by a multisig, who are the participants and what is the signature threshold (e.g., 5 out of 8)?
  • Audits: Has the bridge undergone independent security audits? Reports should be publicly available.
  • Bug Bounty: Is there an active bug discovery program with rewards?
  • Insurance: Does the bridge have an insurance fund to cover losses in case of a hack?
  • Limits and Delays: Are there daily withdrawal limits or time delays (timelock) for critical operations?

Step 3. Secure Storage and Operational Security (OPSEC)

1. Choosing a Storage Method

• Exchanges (Binance, Coinbase): Convenient for trading, but you do not control the private keys. Risks: platform bankruptcy, account freeze.
• Non-custodial Wallets (MetaMask, Trust Wallet): You control the keys, but they are stored on a device connected to the internet ("hot" wallet). Suitable for small amounts.
• Hardware Wallets (Ledger, Trezor): Store private keys offline ("cold" storage), providing maximum protection. Recommended for significant amounts.

2. AML Check of Counterparties

Before interacting with a new address, check it for sanctions labels. Enter the address into an explorer (Etherscan, Solscan) and look for public labels (e.g., "OFAC Sanctioned"). For large transactions, use professional AML services.

3. Regular Approval Audits

Do not leave active approvals for DApps you do not use.

• How to revoke: Use verified services. Before connecting your wallet, ensure the domain is authentic (check the SSL certificate and address).
  • Revoke.cash: Open the revoke.cash website, connect your wallet, and revoke all unnecessary or infinite permissions.
  • Etherscan Token Approvals: On your Etherscan address page, open the More → Token Approvals tab.
• Review Example: If you see an Unlimited approval for a contract you haven't used in a long time, it is a high risk. Revoke it immediately.

4. Phishing Protection

Scammers use news about regulations for attacks. A message like "Your wallet must pass KYC, connect via this link" is a scam. No official service will ever ask for your seed phrase. Always check the website domain.

Step 4. Advanced Protection Methods

• Multisig Wallets: Require multiple signatures for a transaction (e.g., 2 out of 3), eliminating a single point of failure. The leading solution is Safe (formerly Gnosis Safe).
• Institutional Custodians: Services like Fireblocks or Copper provide storage with insurance coverage and strict access policies for large capital.

Prioritizing Measures and Risk Matrix

Asset Amount	Priority Measures	Audit Frequency
Up to $1,000	Use of a hardware wallet. Regular revocation of approvals.	Revoke approvals: once a month.
$1,000–$50,000	Hardware wallet. Revocation of approvals. AML check before large transactions.	Revoke approvals: after every DeFi session.
Over $50,000	Multisig wallet (Safe) with multiple hardware keys. Asset distribution across different stablecoins/networks. Contract analysis before interaction.	Constant monitoring of approvals. Quarterly review of storage strategy.

What to Do in Emergency Situations

Situation 1: "Dirty" Funds Received in Your Wallet

If you received an unexpected transfer from an address associated with illegal activity (e.g., Tornado Cash mixer):

• 0–24 hours: Do not touch the funds. Do not move, exchange, or use them. Isolate this address. Record the data: TxID, sender address, amount, time (take screenshots).
• 24–72 hours: Consult a lawyer specializing in digital assets. This is your main step to assess risks and develop a strategy.
• After consultation: Per legal recommendation, you may need to notify the stablecoin issuer or exchange.

Situation 2: Your Assets Are Frozen

1. Immediately contact a lawyer. Do not take independent actions.
2. Contact the issuer or exchange to obtain the official reason for the block. Use a formal inquiry template.

• Inquiry Template for Issuer/Exchange:

Subject: Inquiry Regarding Asset Freeze on Address [Your_Address]

Dear [Company Name] Compliance Team,

I am writing to inquire about a freeze placed on my assets located at the blockchain address [Your_Address]. I am the owner of this address.

Please provide the reason for this action, the case number if available, and the procedure for resolving this issue. I am prepared to provide all necessary information to prove the legitimacy of my funds.

Sincerely,
[Your Name]

3. Prepare a document package for the lawyer and issuer:
   • IDs of all transactions (TxID) related to the blocked funds.
   • Identity verification documents (KYC) if you have undergone verification.
   • Proof of Funds: exchange statements, contracts, tax returns.
   • A signed message from your address to prove ownership.
   • Keep all evidence (screenshots, correspondence) in a safe, isolated location.

Final Security Checklist

• Storage: Core assets on a hardware wallet. For large amounts — multisig.
• Contract Analysis: You have checked who owns your stablecoin contract and if it has pause / blacklist / upgradeTo functions.
• Counterparty Check: Addresses are verified via explorers or AML services before large deals.
• Approvals: Regularly revoked via Revoke.cash or Etherscan. Infinite approvals are not permitted.
• Authentication: App-based 2FA enabled for all exchange and email accounts.
• Seed Phrase: Stored only offline (on paper/metal); no digital copies exist.
• Action Plan: You know what to do (and what not to do) upon receiving suspicious funds or an asset freeze.