Much has been written about the benefits of secure, asset-backed stablecoins – as distinguished from “unstablecoins” like terraUSD (UST) – as powerful tools for promoting financial inclusion, facilitating payments and driving the Web3 economy. But what is less known is that the leading U.S. dollar-backed stablecoins – tether (USDT) and USD coin (USDC) – are also powerful tools for fighting crime. Indeed, the issuers of these tokens have become critical partners of law enforcement seeking to trace and freeze illicit proceeds in real time before bad actors cash out and reap the rewards of their crimes.
Jason Weinstein is the director of the Blockchain Alliance and the co-chair of both the Blockchain and Cryptocurrency group and the Investigations and White Collar group at Steptoe.
Why is a stablecoin like USDT so valuable to cops, as opposed to criminals? It’s because of tether’s ability not just to follow the money but to freeze it – anywhere, at any time, in any wallet. Regardless of how bad actors obtained the USDT – and even if held in self-hosted wallets – Tether, the stablecoin's issuer can disable those tokens so the bad actors cannot move them or cash them out. Circle, one of the companies behind USDC, has the ability to do the same pursuant to appropriate legal process. This is a remarkably powerful tool for investigations of all types of crimes, as well as terrorism financing and other national security threats. (Full disclosure: Tether and Coinbase [COIN] are clients of my law firm, Steptoe.)
The founding ethos of cryptocurrency was that the flow of money should be unstoppable. However, like other responsible participants in this ecosystem, Tether will intervene in response to valid law enforcement requests in order to combat criminal activity. As just one example, in the past few months Tether has implemented approximately two dozen freezes totaling tens of millions of USDT at the request of U.S. Department of Justice (DOJ) prosecutors in a fast-moving, high-profile cybercrime/national security investigation, working with prosecutors around the clock to execute the freezes in real time. Tether, which is based overseas and does not operate in the U.S, provides this assistance voluntarily based on valid law enforcement requests. Numerous DOJ prosecutors have praised Tether for its proactive assistance and strong support for DOJ investigations, and observed that Tether represents the antithesis of “jurisdictional arbitrage.”
Indeed, as a sign of the growing importance of DOJ’s partnership with Tether, the FBI has asked Tether to make an exception to its U.S.-customer prohibition and allow the FBI itself to be a Tether customer.
Tether’s and Circle’s commitment to support law enforcement while protecting users and their privacy is nothing new. Since 2015, I have had the privilege of leading the Blockchain Alliance, a nonprofit public-private partnership co-founded by the Chamber of Digital Commerce and Coin Center. The Alliance is made up of more than 150 participating digital asset companies and government agencies in the U.S. and around the world, dedicated to the mission of working together to prevent, detect, and address criminal activity involving digital assets.
The Alliance serves as a resource for law enforcement and regulators, providing education, training, and technical assistance to help government agencies respond to challenges faced during investigations. Through the Alliance, companies and government agencies engage in dialogue about technical issues, policy questions and other areas of concern. The overall goals of the Alliance are to make the digital asset ecosystem more secure, build trust between industry and government, promote compliance, and foster the growth of this transformative technology. Coinbase and Circle (the co-founders of the Centre Consortium, which launched USDC) and Tether are long-time members of the Alliance.
As policymakers focus on approaches to regulate asset-backed stablecoins, it is increasingly common to hear discussions about the need to protect consumers and financial markets. Both are unquestionably important goals. But no discussion of stablecoin regulation is complete without a fuller understanding of the important role of the two leading U.S. dollar-backed stablecoins, USDT and USDC, in promoting financial integrity and protecting national security and public safety.