Your Stablecoins Could Be Frozen Without Warning, Even If You Did Nothing Wrong

Consequently, attempts to freeze assets linked to unlawful activity can occasionally produce unintended consequences, leaving legitimate users with restricted funds despite facing no allegations of wrongdoing.

“Often, legitimate funds are only frozen by accident,” he said, adding:

Legitimate funds may also be frozen because compliance systems can misread unusual but lawful activity. Fritsche indicated that some institutions depend on flawed heuristics to identify potentially illicit behavior, increasing the likelihood that innocent users are flagged incorrectly.

“Legitimate funds may be frozen because institutions interpret them as high-risk, or likely illicit,” he said. “Institutions sometimes used flawed heuristics to monitor user behavior and freeze high-risk transactions.”

“A beginner performing random actions or a veteran trader leveraging a novel trading strategy can both appear unusual, and trigger precautionary enforcement actions.”

Fritsche remarked that users should not anticipate advance warning before a freeze. In some cases, issuers may be prohibited from contacting the affected user.

Pointing out that users may have few practical warning signs before a freeze, he cautioned:

“In fact, the issuer is not allowed to warn or communicate with the to-be-frozen user. Even after the fact, the user can only go through the court, which is a very tedious process.”

That situation may leave customers unable to access funds while attempting to determine why the freeze occurred.

“That also amplifies how untenable it is for Circle and others to be freezing legitimate assets,” Fritsche said. “It creates a terrible and confusing situation for their legitimate customers.”

He observed:

“The most obvious is reputational harm for the industry.”