PwC crypto expansion and the risk of stablecoin blocking

Stablecoin Freezing: How to Protect Assets in the Era of Total Control

In August 2022, the US Treasury added the crypto mixer Tornado Cash to its sanctions list, leading to the freezing of assets across thousands of addresses. This precedent marked the end of the era of conditional anonymity and the beginning of an era of strict regulation.

This article is a practical guide for private investors, traders, and corporate treasurers operating with amounts starting from $10,000 in digital assets. After reading, you will be able to:

1. Assess risks associated with centralized stablecoins (USDT, USDC).

2. Verify smart contracts for the presence of blocking functions.

3. Develop a migration plan into safer assets and prepare documentation to protect your funds.

   TL;DR: Three Steps to Safety

4. Verify transactions: Use AML services to analyze incoming transfers.

5. Diversify assets: Move part of your funds from USDT/USDC into decentralized alternatives (e.g., DAI).

6. Prepare documents: Collect evidence of the Source of Funds in advance.

Key Terms

• Stablecoin — a cryptocurrency whose value is pegged to a stable asset, such as the US dollar (USDT, USDC, DAI).
• AML/KYC (Anti-Money Laundering / Know Your Customer) — a set of measures to combat money laundering and identify clients.
• OFAC (Office of Foreign Assets Control) — a division of the US Treasury responsible for applying sanctions.
• Multisig (multi-signature) — a technology that requires multiple private keys (e.g., 2 out of 3) to authorize a transaction, increasing storage security.
• Decentralized stablecoin — a stablecoin managed by code (smart contracts) rather than a centralized company.

Why Control is Tightening: Three Key Factors

The stablecoin market, with a capitalization exceeding $161 billion (according to CoinGecko as of October 2023), can no longer remain in the "gray zone." The tightening of control is driven by three factors:

1. Position of US Regulators. Reports from the US Treasury, such as "The Future of Money and Payments," directly indicate the intent to treat stablecoin issuers like banks. This entails the implementation of strict AML rules and mandatory Know Your Customer (KYC) verification.
2. Market Institutionalization. The entry of auditing giants like PwC (annual revenue — $53.1 billion) into the crypto industry signals a demand for transparency from major investors. Reserve audits and compliance consulting enhance user de-anonymization.
3. Combating Illegal Activity. Regulators actively use freezing mechanisms to curb terrorist financing and sanctions evasion. This directly affects ordinary users, whose funds may be mistakenly linked to "dirty" addresses.

Risks for Holders: How Freezing Works

The primary risk is asset freezing. This can occur at the exchange level or the smart contract level of the stablecoin itself.

• Custodial Wallets (Exchange Accounts). Centralized exchanges (CEX) have full control over your funds and are required to comply with regulatory requirements, including OFAC sanctions lists. Your account will be frozen at the slightest suspicion.

• Non-custodial Wallets (Self-custody). Here, you control the private keys (MetaMask, Trust Wallet, hardware wallets). However, this does not provide full protection against the freezing of centralized stablecoins. Their smart contracts contain functions that allow the issuer to freeze tokens at any address.

• USDT (Tether) and USDC (Circle): The smart contracts for these tokens include functions like blacklist, freeze, or destroyBlackFunds. These allow the issuer, upon request from law enforcement, to blacklist addresses, blocking the ability to send or use the tokens.

  Important: Control mechanisms may vary depending on the network. For example, USDT on Ethereum and USDT on Tron are different tokens with different smart contracts. Always check the contract in the network where you store your assets.

How to Check a Smart Contract for Blocking Functions

1. Find the stablecoin's contract address on your preferred network (e.g., via CoinGecko).
2. Go to the block explorer (Etherscan for Ethereum, Tronscan for Tron, etc.) and paste the address.
3. Open the "Contract" tab and select "Read Contract" or "Write Contract."
4. Use page search (Ctrl+F) to look for keywords: blacklist, freeze, pause, block. The presence of such functions indicates the possibility of centralized blocking.

The Alternative: Decentralized Stablecoins

To diversify risks, consider decentralized stablecoins, which are not controlled by a single company and cannot be frozen centrally.

• Examples: DAI (from MakerDAO), FRAX (from Frax Finance).
• Advantages:
  • Censorship Resistance: There is no single issuer capable of freezing assets.
  • Transparency: All collateral and management mechanisms are visible on the blockchain.
• Limitations and Risks:
  • De-pegging Risk: Stability depends on algorithms and the quality of collateral assets.
  • Smart Contract Risk: Vulnerabilities in the protocol code could lead to loss of funds.
  • Bridge and Wrapped Token Risks: When moving assets between networks via bridges or using wrapped versions (e.g., USDC.e), you trust your funds to an additional counterparty, creating new risks.

Practical Guide to Asset Protection

Legal Disclaimer

This article is for informational purposes only and does not constitute legal advice. Cryptocurrency regulation varies significantly by jurisdiction. AML reports do not provide a 100% guarantee and may be challenged by local regulators. For handling large sums and resolving complex issues, always consult a specialized lawyer in your country.

Checklist for Migration to Decentralized Stablecoins

1. Choose a Protocol: Study the documentation, security audits, and the composition of collateral assets (e.g., MakerDAO for DAI).
2. Assess Liquidity: Check trading volumes on key DEXs (Uniswap, Curve) to ensure you can exchange large amounts without significant slippage.
3. Choose a Bridge (if necessary): When transferring between networks, use bridges with a good reputation, high Total Value Locked (TVL), and completed audits.
4. Perform a Test Transaction: Complete a full cycle (exchange, bridge transfer, sale) with a small amount (e.g., $20) to understand the process, timing, and fees.
5. Main Transfer: Only after a successful test should you transfer the main amount.

Essential Protection Steps

1. Conduct AML Analysis of Transactions. Before receiving funds, check the sender's address using AML services (Chainalysis, TRM Labs, Elliptic, Crystal). Request a report showing the Risk Score and OFAC hits. A report from a reputable service will be a strong argument when communicating with an exchange's compliance department.
2. Set Up a Multisig Wallet. For storing amounts over $50,000, use non-custodial multisig wallets. This protects against theft and single points of failure.

   • Recommended Product: Gnosis Safe — the industry standard for creating multisig wallets.

   • Example Setup: A "2 out of 3" scheme, where signatures from two out of three independent keys (e.g., two Ledger hardware wallets and one software wallet) are required to confirm a transaction.

   • Recovery Procedure: Restoring access requires a sufficient number of keys to reach the threshold (e.g., 2 out of 3). Losing more keys than the scheme allows will lead to irreversible loss of funds.

     Note: Some wallets, like Argent, use "social recovery" through trusted guardians, which is an alternative to classic multisig.

3. Prepare a Source of Funds Document Package. Collect an archive in advance confirming the legality of your assets.
   • Document List:
     • Trade history exports from exchanges (CSV, PDF).
     • Bank statements confirming the funding of exchange accounts.
     • Screenshots of P2P trades with order details.
     • Contracts, invoices, or tax returns if funds came from the sale of property, salary, or business.
   • Storage Format: Keep documents in cloud storage in PDF format, grouped by date and source.
4. Segregate Assets. Do not mix funds from different sources (e.g., from P2P trading and from your salary) on the same address. Separating flows makes it easier to prove their origin.

What Not to Do: Key Prohibitions

• Attempting to Bypass KYC/AML. Using fake documents or someone else's data is a direct path to permanent account blocking and potential criminal prosecution.
• Using Suspicious Mixers. Services for mixing transactions, especially those under sanctions (like Tornado Cash), will guaranteed flag your funds as high-risk.
• Publicly Posting Seed Phrases or Private Keys. Never store them digitally in the cloud, send them in messengers, or show them to anyone.

Mini-Case: Unblocking Funds on an Exchange

Scenario: You received 5,000 USDT in your exchange account after a P2P trade. The exchange froze the account due to a "risky transaction."

• Step 1: Information Gathering. Contact support immediately.

  Request Template:
  Subject: Information request regarding account freeze [Your ID/email]

  My account [Your ID/email] was frozen on [date]. Please provide the exact reason for the freeze and the transaction hash (TxID) that caused suspicion. I am ready to provide all documents to clarify the situation.

• Step 2: Evidence Preparation. Gather trade documents: a screenshot of the P2P order, a bank statement for the payment, and, if possible, order an AML report on the sender's address.

• Step 3: Communication with Compliance. Provide all collected documents. Answer questions clearly and point-by-point. The process may take from a few days to several weeks.

• Result: If you can prove the legality of your part of the trade, the exchange is highly likely to unfreeze the account, possibly with a recommendation to withdraw the "risky" funds to an external wallet.

Key Takeaways

1. Regulation is a Long-Term Trend. Proactive preparation for compliance checks is becoming a prerequisite for working with digital assets.
2. Control Over Keys Does Not Guarantee Control Over Assets. Owning a non-custodial wallet does not protect against the freezing of centralized stablecoins at the smart contract level.
3. Diversification is the Key to Resilience. Distribute assets between centralized and decentralized stablecoins, as well as between different types of wallets, to minimize risks.

Useful Links and Resources

• Contract Verification: Etherscan, Tronscan, BscScan.
• Multisig Setup: Gnosis Safe Guide.
• Stablecoin Documentation: MakerDAO (DAI), Circle (USDC), Tether (USDT).
• Bridge Analysis: L2BEAT Bridges — a resource for assessing the risks of various bridges.