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This New Stablecoin Has a Backdoor for Freezing Funds Too

Sead Fadilpašić
Last updated: | 2 min read

USD//Coin (USDC), a cryptocurrency recently released by crypto startup Circle, retains the right to blacklist addresses and freeze funds should they decide they are being used for illegal activities. The community is outraged and many are looking for stablecoin alternatives to USDC.

Source: iStock/Kirillm

However, the situation is similar in some other stablecoins: both Tether and TrueUSD have clauses that say they reserve the right to refuse service to anyone they want to, without any explanation. The only coin that doesn’t seem to have such a user agreement is DAI, by Maker, which is why many social media users claim to be switching over to it.

Now, back to USDC, in Section 14, titled “Risk Factors & Disclosures” in its User Agreement, Circle states that, “Circle reserves the right to ‘blacklist’ certain USDC addresses and freeze associated USDC (temporarily or permanently) that it determines, in its sole discretion, are associated with illegal activity or activity that otherwise violates the terms of this User Agreement (“Blacklisted Addresses”). In the event that you send USDC to a Blacklisted Address, or receive USDC from a Blacklisted Address, Circle may freeze such USDC and take steps to terminate your USDC Account. In certain circumstances, Circle may deem it necessary to report such suspected illegal activity to applicable law enforcement agencies and you may forfeit any rights associated with your USDC, including the ability to redeem USDC for U.S. Dollars.”

“Reserves associated with USDC balances held on blacklisted addresses may be wholly and permanently unrecoverable,” Circle explained on its website.

Ardon Lukasiewicz, CEO of crypto advisory firm, reacted:

Reddit users, meanwhile, are warning that this is the exact reason Bitcoin exists: “It’s almost like we should just keep our money in bitcoin… in our own wallet with our own private keys…” writes u/InquisitiveBoba.

However, the Twitter user who discovered the “the Section 14” added:

Of course, this backdoor goes against the decentralized policy of cryptocurrencies, and the libertarian politics that have spawned Bitcoin in the first place. The community is rankled at the thought that someone else effectively has more power over their funds than they themselves do.

However, this turn of events could be the price users have to pay for the security of a Goldman Sachs-backed stablecoin. When this stablecoin’s trading was announced, Reddit user @tradingroomapp, a developer of trading strategies for institutional investors, wrote on Twitter, “USDC is Goldman Sachs backed @circlepay stablecoin. I will feel much safer holding USDC vs tether (on relative terms). Don’t be surprised if USDC takes a large market share from tether in short period of time.”