US prosecutors have become increasingly aggressive in freezing digital assets believed to be traceable to illicit activities such as money laundering, “pig slaughter” schemes, sanctions violations and other financial crimes. However, the freezing of digital assets takes on a new dimension when the issuer initiates it voluntarily at the request of the government, bypassing the legal protections of a traditional asset seizure. In such cases, digital asset holders are often caught off guard, unaware that their funds are allegedly tainted and suddenly deprived of access to assets or income acquired through legitimate means.
Traditional asset seizures
In traditional financial crime investigations, the federal government’s authority to restrict or seize assets is governed by established legal and constitutional safeguards. Typically, law enforcement must prove a connection between the property and the alleged criminal activity and obtain court authorization, such as a seizure order, before restricting access to those assets.
The seized assets are then subject to the federal forfeiture regime, which operates through overlapping authorities, including civil forfeiture under 18 USC §§ 981 and 983, and criminal forfeiture under 18 USC § 982.
Digital Asset Blacklist
The voluntary freezing of digital assets represents a departure from traditional seizure processes. Instead of obtaining judicial authorization, authorities can request that an issuer freeze or blacklist specific wallet addresses. This practice has been reinforced by the GENIUS Act, which requires stablecoin issuers to maintain the technical ability to freeze, burn, or otherwise restrict tokens to comply with law enforcement directives.
For affected digital asset holders, recourse through the stablecoin or other digital asset issuer is typically limited because those issuers typically defer to the requesting government agency and are unaware of the underlying basis for the freeze. As a result, individuals and entities whose assets have been frozen should typically contact the relevant government authority directly to request relief.
These challenges are compounded by two defining characteristics of blockchain systems: pseudonymity and traceability. While wallet addresses do not inherently reveal the identity of their owners, blockchain transactions are publicly visible and can be traced across multiple transfers without the use of mixers or other privacy-enhancing services. Therefore, law enforcement agencies routinely use blockchain forensic tools to track the movement of funds coming from wallets suspected of being involved in illicit activities.
At the same time, tracking funds through a decentralized network introduces significant uncertainty due to the wallet’s pseudonym. Although investigators can identify an initial source of illicit activity, they often cannot or choose not to expend the resources necessary to differentiate between wallets controlled by individuals who are involved in the criminal scheme and those controlled by innocent bystanders who have unknowingly received the allegedly tainted funds.
In our experience – including the successful unlocking of tens of millions of dollars in improperly frozen funds – it is not enough to simply point out the number of transactions, or “hops,” between the upstream illicit activity and the downstream frozen wallet. Instead, government agencies will seek to understand how and why the funds were acquired and demand contemporaneous documentary evidence of the legitimacy of the transactions, unfairly but unequivocally shifting the burden of proof from the investigating agency to the holder of the digital assets whose funds have been frozen.
In short, the approach of the US authorities is freeze first and ask questions later – and then require the owners of the frozen digital assets to prove their innocence to recover their funds. This tactic, combined with US authorities’ broad view of US jurisdiction, puts all holders of stablecoins or other digital assets anywhere in the world at risk, whether they have unknowingly acquired the assets five, 10, or even 20 hops downstream from illicit activity.
Practical advice for stablecoin issuers and those affected by stablecoin freezes
Despite the challenges involved, participants on both sides of the government’s digital asset freeze requests (both issuers and holders) retain a variety of ways to protect themselves:
People and entities affected by the freezing of digital assets
When a wallet is frozen, the window to respond effectively can be narrow and early missteps can be difficult to correct. To minimize these risks, we recommend digital asset holders:
- Hire attorneys with experience not only in criminal defense and collaboration with government agencies, but also specifically in digital asset matters, transactions, and digital asset tracking.
- Assemble a clear factual record: how the funds were acquired, the purpose of the transactions, and any due diligence performed on counterparties. For entities, this should also include relevant internal policies governing the use of digital assets. The goal is to present a consistent and well-supported account demonstrating that the funds were obtained and used for legitimate purposes, without knowledge of any underlying illicit activity.
- Consider a proactive approach. In some cases, it may be advantageous to proactively engage with the government agency responsible for the freeze, rather than waiting for further action. Early engagement, if handled carefully, can help shape the narrative before the government’s speculative assumptions solidify into more hardened narratives.
- And of course, be careful. Communications with issuers or investigators may have legal consequences, and statements made without a complete understanding of the facts or legal position may complicate efforts to secure the release of funds.
Digital asset issuers
To reduce exposure to civil litigation from users who believe their assets have been improperly frozen, digital asset issuers can:
- Adopt clear and consistent procedures when responding to government freeze requests, including how and whether issuers respond to user requests for information.
- Maintain an internal policy that governs when and how such requests are fulfilled, particularly when the request is not supported by a court order or other mandatory process.
- Make clear in the user’s terms of service or other documentation that the issuer complies with government freeze requests, including those that are not accompanied by a court order or other mandatory process, if applicable.
- Maintain a record of all communications with government agencies or users regarding specific freeze requests and the basis for the freeze.
