TheBlock, a quality cryptocurrency publication, reported this week that USDC, a US Dollar backed stablecoin, has blacklisted one account for the first time in the history. The blacklisted address cannot receive or send USDC funds. Based on EtherScan comment on an associated address, the blacklisted address could be associated with theft.
USDC is a US dollar-backed stablecoin. The reserve dollars are deposited in a US Bank and a corresponding amount of tokenised USDC is minted on Ethereum blockchain. The operation is run by Centre, the same company that runs Circle cryptocurrency exchange in the past. Coinbase is a heavy promoted and associated with USDC.
The cryptocurrency community is roaring. Although USDC never was "censorship-resistant" now this fact is made more obvious. Hardcore crypto folks ask people to switch to DAI and other stablecoins were reserves are held in other cryptocurrencies to avoid US juridical system. (Whereas Goldman Sachs recommends US bank-backed stablecoins, Goldman being the preferred bank.)
This was a long time coming. Centre user agreement states that they follow law enforcement actions.
What do you need to understand about stolen assets?
If something is stolen from you should you be entitled to get your stolen property back? Most court systems treat Bitcoin and other cryptocurrencies as property, so there exists precedence. More specifically it boils down to his 4000 years old legal question:
- Stolen goods: Can you buy a good title on them or do they need to be returned to the original owner? Can a thief keep and sell what they stole?
A thief can or cannot. These two options are called, as quoted in the article above
- "Nemo dat quod non habet" (no one gives what he does not have). In other words, no one can take a good title from a thief. This is the model followed by United States juridical system.
- “Market Overt” doctrine pursuant to which bona fide purchasers from merchants can prevail over the erstwhile owner of stolen goods. If a thief manages to sell stolen assets for someone buying them in good faith the assets become "laundered" and the original owners can no longer have claim over their property. A case I know personally very well is that if a stolen car is sold in Finland and a buyer has no reason to suspect foul play, the buyer can keep the car.
Of course, these rules are not clean-cut, but the ends of a spectrum. Circumstances, court systems and other factors always play a role when a judge decides what's going to happen with stolen assets.
This is my assumption: Whoever has those USDC 100,000 in the blacklisted Ethereum account is most likely associated with illegal activity and stole cryptocurrency from someone. This someone filed a police report on the United States and wants back what is rightfully theirs. Now the slow wheels of justice have started to turn and the first step is to freeze the assets of the thief to ensure they do not disappear further.
What does this mean to the cryptocurrency community?
Old school thinking is there are no courts in censorship-free crypto. Code is the law. If someone steals from you, there is no appeal process to get back your property. A victim often only receives is laugh from crypto maxis educating you "not your keys, not your crypto."
The attitude is changing slowly. Developers start to think more carefully trade-offs on different censorship resisting vs. juridically enforceable options. There are even services helping in legal and enforcement work for you to reclaim your stolen crypto.
- This is a good thing for small folks, as it sets an example and we will likely see more victims of cybercrime getting their money back if they keep using USDC.
- Centralised cryptocurrency exchanges should start seeing more claims against the exchange themselves when thieves use them to launder stolen assets to fiat currencies or other cryptocurrencies. If cryptocurrencies are held in custody, by the principle of Nemo dat, the original owner should be able to claim back their assets from the exchange itself. In this case, it was the exchange's fault of not checking the source of funds properly, so they should be liable for a hit on their own balance sheet.
- Decentralised pooled asset baskets, like decentralised exchanges (DEXes) and lending pools might be in trouble. If a thief injects stolen assets in these pools, the whole pool might become tainted, making everyone who is a part of the pool being liable to return a share of their assets to the original owner.
- In the long run, the political situation between the United States, Chine and Russian might lead to further weaponisation of US Dollar, pushing more and more global stablecoin users to cryptocurrency-backed stablecoins instead of US Bank-backed stablecoins.
- Pools like MakerDAO might start to discourage the use of USDC, USDT and other US Bank-backed assets to minimise the risk of damage to the pool participants in the case of there is legal action related to the underlying asset in the United States.