Stablecoin risks: protect your assets
Stablecoins such as USDT, USDC, and their counterparts have taken a central place in the crypto economy. They are used for hedging volatility, settlements, and transfers between various platforms. However, with the tightening of regulation and the growth of control over financial transparency, users are facing new risks. Let's break down the main issues and protection measures.
Why is stablecoin regulation important?
In September 2022, the U.S. Treasury issued a report titled "The Future of Money and Payments," which discussed "payment stablecoins" and recommended introducing strict reserve and oversight requirements similar to banking standards. Such regulation aims to protect consumers, but for cryptocurrency users, it entails several risks:
- Freezing of funds. If your wallet ends up on OFAC sanctions lists due to interaction with "dirty crypto" or suspicious transactions, your assets may be frozen. For example, on August 8, 2022, OFAC sanctioned the popular mixer Tornado Cash, which caused mass blocks of associated addresses and transaction bans for individuals and companies within U.S. jurisdiction.
- Loss of access to platforms. Exchanges and wallet providers are forced to tighten KYC measures and AML screening, which can lead to service denials or additional checks.
Main risks for users
1. Financial losses
- Depegging from $1. If a stablecoin issuer faces liquidity problems, the exchange rate may temporarily or permanently deviate from the target mark. An example is the USDC case in March 2023, when the collapse of SVB bank and Circle's disclosure that about $3.3 billion of reserves were held at SVB led to a short-term "depeg."
- Illiquid reserves. If an issuer's reserves are held in illiquid assets or with unreliable counterparties, users may face delays in conversion.
2. Asset blocking
Wallet addresses associated with dirty crypto may be flagged as suspicious. Even if a user is not involved in illegal activities, funds may be frozen until the investigation is completed.
3. Reputational and operational risks
- Theft and hacks. Vulnerabilities in smart contracts or bugs in code can lead to loss of assets. For example, attacks on cross-chain bridges regularly lead to major thefts.
- Drop in trust. Incidents related to the collapse of TerraUSD (UST) in May 2022 undermined trust in algorithmic stablecoins, causing a mass withdrawal of funds and the collapse of the ecosystem.
How to protect yourself: practical tips
For private users
- Verify addresses before transactions. Use AML screening to identify links to sanctioned tags or fraudulent activity. This will help avoid funds being blocked.
- Choose regulated platforms. Work with exchanges and custodians that comply with KYC requirements and provide transparent reporting.
- Diversify your portfolio. Do not store all funds in one stablecoin or on one platform. Consider the risks of algorithmic stablecoins, as was the case with TerraUSD.
- Use cold wallets. Store the bulk of your funds off exchanges in wallets with multi-signature protection. This minimizes the risk of losing access due to hacker attacks.
- Keep documentation. Save transaction confirmations and due diligence data. This will simplify the process of proving the legitimacy of your assets in case of disputes.
For business users and projects
- Conduct regular audits. Ensure reserve transparency and smart contract security.
- Strengthen compliance. Implement automated tools for address verification and transaction monitoring.
- Prepare for crises. Prepare a crisis management plan that includes legal support and mechanisms for returning funds to users.
Why is wallet verification important?
On-chain AML screening helps to promptly identify risks associated with addresses and transactions. For example:
- Identifying links to scammers. Before sending funds, you can check if an address is linked to known scams, as was the case with TerraUSD.
- Detecting suspicious activities. Transaction analysis helps detect interactions with mixers or sanctioned addresses.
How to do it?
- Use specialized services that provide risk assessment for wallets.
- Check address history to avoid interacting with suspicious counterparties.
- Enable automatic notifications on platforms where your assets are stored.
Conclusion
Increased regulation of stablecoins brings both pros and risks. Users must be prepared for new requirements such as KYC and AML screening, as well as potential asset blocks. To minimize risks:
- Diversify your funds and use trusted platforms.
- Verify addresses before transfers to avoid interaction with "dirty crypto."
- Monitor updates in legislation and strengthen your security measures.
Taking these steps will help protect your assets and maintain access to cryptocurrency services in an environment of increased regulation.