When Tether and Circle moved to freeze billions of dollars in digital assets following the Binance security breach, the action was widely seen as an important step in limiting the damage. The companies were able to restrict the movement of tokens believed to be connected to the theft, making it harder for the attackers to convert them into other assets or move them through the wider financial system.

There was, however, another side to the intervention. Two private companies had effectively stopped a substantial amount of digital money from moving. This is not a small detail for an industry that has spent years promoting the idea that blockchain technology can reduce dependence on banks and other financial intermediaries.

The Binance incident has brought an old contradiction in cryptocurrency back into focus. Digital currencies may operate on decentralised networks, but some of the most widely used assets still depend on companies that retain considerable control over them. Stablecoins are a particularly clear example. Their value is linked to conventional currencies, but the companies issuing them can also restrict transactions under certain circumstances.

The ability to freeze stolen assets can be useful. Yet the same power raises questions about financial independence, corporate authority and the rights of people whose funds are restricted.

The Difference Between Owning a Token and Controlling It

Tether and Circle are among the most influential companies in the stablecoin market. Their tokens, USDT and USDC, are widely used by cryptocurrency traders who want to hold assets linked to the US dollar without leaving the digital currency ecosystem. They are also used for payments and international transfers.

Unlike Bitcoin, stablecoins have identifiable issuers. These companies create the tokens and maintain systems that allow them to restrict certain wallet addresses. If an address is linked to suspected criminal activity, the issuer may be able to prevent the tokens held there from being transferred.

This was particularly relevant after Binance reported the security incident on October 29. Tether froze nearly $1.57 billion in assets associated with the attack, while Circle restricted more than $800 million. Other industry participants, including Ripple and World Liberty Financial, also took action against assets linked to the theft. The combined freezing efforts eventually covered a substantial portion of the stolen funds.

The intervention showed that blockchain transactions are not always beyond the reach of centralised institutions. A user may control a private wallet, but that does not necessarily mean the issuer has no influence over the tokens held in it.

Bitcoin works differently. No central company issues the currency or has the technical authority to freeze individual holdings. Transactions can be traced on the public blockchain, but stopping a transfer generally requires cooperation from an exchange, broker or law enforcement agency that can gain access to the relevant assets.

Stablecoins therefore occupy an unusual position. They offer the convenience of digital transfers while retaining some of the control mechanisms associated with traditional financial institutions.

The Same Power That Stops Criminals Can Affect Legitimate Users

There is a strong argument in favour of allowing stablecoin issuers to freeze suspicious funds. Cryptocurrency theft has become a major problem, with criminals moving assets across several networks and jurisdictions. Once stolen money enters the wider market, recovering it can be extremely difficult.

Without the ability to restrict tokens, issuers would have limited options when investigators identify a wallet containing stolen assets. They would have to rely on exchanges and law enforcement to prevent further movement. That could take valuable time.

However, the question becomes more complicated when a wallet is frozen incorrectly. A business might receive payment from an address that is later associated with a criminal investigation. An individual could unknowingly hold tokens that have passed through several wallets before reaching them. Neither situation automatically establishes that the recipient was involved in wrongdoing.

A freeze can leave legitimate users unable to access their money while an investigation continues. For a company using stablecoins to pay suppliers or employees, even a temporary restriction could disrupt normal operations.

There is also the question of who decides when a freeze is justified. Issuers operate under different legal and regulatory arrangements, and their decisions may be influenced by law enforcement requests, sanctions requirements or internal risk policies. Users do not always have a clear understanding of the procedures involved.

The cryptocurrency industry needs a more transparent approach. Companies should explain the circumstances in which they can restrict tokens, how long restrictions may remain in place and what options are available to people who believe their assets have been frozen by mistake.

The issue is not whether criminals should be allowed to keep stolen money. It is whether companies exercising such significant powers should be subject to clear rules and meaningful accountability.

Stablecoins Have Become Too Important to Ignore

The influence of stablecoin issuers has grown alongside the expansion of digital asset trading. Their tokens provide liquidity to cryptocurrency markets, allowing investors to move between different assets without repeatedly converting funds into conventional currencies.

Their role is no longer restricted to trading platforms. Businesses use stablecoins for international payments, while individuals in countries facing currency instability may use dollar-linked tokens to hold savings or receive money from overseas.

This growth has attracted greater regulatory attention. Governments are increasingly concerned about the financial stability, reserve arrangements and operational controls of stablecoin issuers. Their ability to freeze assets is likely to become another important part of the debate.

The Binance incident has shown that these companies can act as more than passive issuers of digital tokens. Their decisions can influence the movement of substantial amounts of money across international markets. That gives them a position of considerable influence, even though they do not operate in exactly the same way as conventional banks.

The concentration of this power is worth examining. If a relatively small number of companies control the issuance of widely used stablecoins, their technical and legal decisions can have consequences for millions of users. This is especially relevant when the same tokens are used across several blockchain networks.

It also raises questions about the relationship between private companies and governments. Regulators may expect stablecoin issuers to cooperate with law enforcement, but they must also ensure that the companies are not exercising arbitrary control over customer assets.

Freezing Assets Does Not Mean Recovering the Money

The Binance incident also illustrates the difference between identifying stolen funds and returning them to their rightful owner.

Once a stablecoin issuer freezes tokens, the attacker may lose the ability to transfer them. But the funds do not automatically return to Binance or the affected customers. Their eventual recovery may require legal procedures, cooperation between jurisdictions and decisions about ownership.

Other stolen assets present a different challenge. Approximately $2.4 billion in Bitcoin and Ether was estimated to be beyond the direct freezing powers of centralised issuers. These cryptocurrencies can still be traced, but they cannot simply be blocked by a company in the same way as certain stablecoins.

Investigators must therefore follow the money through multiple wallets and identify whether any of the assets reach exchanges or brokers capable of restricting them. Criminals may attempt to mix the funds with other holdings, use lesser-known cryptocurrencies or generate thousands of transactions to make the trail harder to follow.

The speed of the response matters. If stolen funds are identified early, the chances of restricting their movement are higher. Once they are spread across different platforms and networks, recovery becomes a much longer process.

The companies involved in the Binance response have demonstrated that cooperation can make a difference. But the incident also shows how dependent the recovery process has become on private businesses sharing information and acting quickly.

The Industry Needs to Be More Honest About Decentralisation

Cryptocurrency companies often present decentralisation as a defining feature of their products. That description is not entirely wrong, but it can create a misleading impression when applied to the entire industry.

The blockchain may be decentralised while the token issued on it remains subject to centralised controls. The wallet may belong to an individual, but the ability to transfer the asset can depend on the issuer’s policies. These are important distinctions that users need to understand before placing substantial amounts of money in digital assets.

For regulators, the challenge is to protect users without removing the practical advantages of stablecoins. Issuers need sufficient authority to respond to theft and financial crime, but their decisions should be transparent and subject to appropriate oversight.

The Binance case has demonstrated why stablecoin freezing powers can be valuable during a major security crisis. It has also exposed the extent to which private companies can influence the movement of digital money.

The question is no longer simply whether cryptocurrency can operate outside traditional banking. In important parts of the market, it already depends on a different set of financial intermediaries. The industry now needs to explain how those intermediaries should be held accountable.

(Adapted from CNBC.com)

Categories: Creativity, Economy & Finance, Regulations & Legal