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After a year of major enforcement actions against crypto firms in the US, ����žž speaks with blockchain analytics firm ChainArgos about the likelihood of similar charges being filed against Tether.

By the end of 2023, the world’s two largest crypto exchanges had both been convicted of criminal charges in the US.

At FTX and sister firm Alameda Research, much of the former C-suite ended the year with convictions for fraud and money laundering offences.

In late 2021, near the peak of the crypto bull market, FTX was Tether’s largest customer via Alameda Research, which served as both an FTX market maker and a proprietary trader.

In total, according to a  by Protos.com, by November that year Alameda had received almost $36.7bn in USDT.

After Alameda, Tether’s next largest customers were Binance market maker Cumberland and other Binance liquidity providers.

Like the C-suite at FTX and Alameda, Binance and former CEO Changpeng Zhao ended the year with a range of criminal convictions in the US.

As part of a record-breaking $4.3bn settlement, Binance pleaded guilty to crimes including sanctions violations and failures to implement anti-money laundering (AML) and know your customer (KYC) controls.

Tether blacklisting activity surges in late 2023

The trail of enforcement actions against Tether’s major customers has led to speculation that Tether itself is next on the list.

As covered by ����žž, Tether is widely suspected to have engaged in similar compliance violations as Binance, particularly in the areas of sanctions and AML.

Patrick Tan, general counsel of ChainArgos, has been tracking Tether’s movements on-chain and noticed some unusual compliance activity towards the end of 2023.

In October last year, following Hamas’ incursion into Israel, Tether began to blacklist an increasing number of wallets.

It also began to make frequent public announcements about its partnerships with law enforcement in multiple jurisdictions, including the US.

On October 16, Tether  that it had frozen 32 addresses containing almost $900,000 USDT linked to “illicit activity in Israel and Ukraine” — the Israeli portion linked to Hamas operations.

The move did little to stem the barrage of negative press linking Tether to terrorism around that time, and by the end of the month, US senator Cynthia Lummis (R-WY) had publicly  for Tether to be criminally charged.

A new approach to blacklisting

The next month, Tether  that it had worked with the US Department of Justice (DOJ) and crypto exchange OKX to freeze $225m USDT.

Believed to be the proceeds of pig butchering scams in Southeast Asia, it was the single largest freeze in Tether history.

One week later, ChainArgos  another likely record, when on December 2 Tether blacklisted 32 wallets in one day.

Collectively, the wallets had transacted billions of dollars of USDT, but Tether did not announce the action publicly.

Tan notes that a single blacklisted address hosted by WhiteBIT, a virtually unknown crypto exchange based in Lithuania, had received a “whopping” $161m in USDT.

One week after this action, Tether  that it had introduced a “new policy to strengthen ecosystem security”, and this included a commitment to freezing wallets on the secondary market.

Previously, Tether’s wallet freezing policy was limited to its own platform. But under the new policy, Tether committed to freezing wallets on any platform if there was a match with OFAC’s Specially Designated Nationals (SDN) List.

The announcement was a significant change in tone compared to Tether’s stance one year earlier, when it had publicly defied OFAC as it moved to sanction Tornado Cash.

Describing the platform as a “notorious virtual currency mixer”, OFAC claimed that Tornado Cash had been used to launder more than $7bn of illicitly obtained cryptocurrency since 2019.

Despite the seriousness of the allegations, Tether responded that “unilaterally freezing secondary market addresses could be a highly disruptive and reckless move by Tether”.

Why the sudden blacklisting frenzy?

Tan pointed to several possible explanations for Tether’s sudden flurry of blacklisting activity and its new secondary market policy.

“First, as governments and national security agencies become more alert to the risks posed by terrorists using cryptocurrencies, the number of blacklisted wallet addresses can be expected to rise,” he said.

“Though many of these blacklisted wallet addresses were flagged by Israeli intelligence earlier in 2023, it is true that more wallet addresses than ever are now being blacklisted by governments and national security agencies.”

Second, Tan said that Tether may have been working behind the scenes with law enforcement “for some time” to blacklist wallet addresses, without announcing these actions publicly.

For example, ChainArgos found  that Tether has blacklisted wallets belonging to North Korean money launderers in advance of their designation by OFAC.

For a brief period, this pre-emptive blacklisting meant that the suspects were unable to transact in USDT but continued to receive USDC from wallets hosted by Coinbase.

“Tether has always maintained that it responds to requests by law enforcement to freeze wallets,” said Tan.

“But for it to pre-emptively blacklist, this raises questions as to what a stablecoin issuer has access to. It would suggest a higher level of cooperation or access to special information.”

Impact of Binance investigation

Given the timing of the uptick in blacklisting activity, Tan suggested that Tether could be responding to new information about its operations obtained through the DOJ investigation into Binance.

“Increased access to Binance's records could have led to pressure on Tether to take a more proactive stance towards the use of USDT in illicit transactions,” he said.

“Binance and its senior executives could have incriminating evidence about Tether's activities, and this may be incentivising Tether to take more proactive action.

“It is also entirely possible Tether is cooperating with authorities as part of a settlement that is yet to be announced.”

Tan added that the stepping down of former CEO Jan van der Velde and his replacement by Paolo Ardoino, formerly chief technology officer, in October last year, would suggest this is the case.

Is Tether on safe ground now?

Looking to 2024, should new charges be issued against Tether, Tan said it is still unclear to what extent its new proactive approach to compliance would be seen as mitigating.

“Ultimately, that would be for a judge and jury to decide, but under the circumstances, doing nothing at all would be the poorer choice,” he said.

“Tether may not be able to go back in time and right past missteps, but it can certainly do better moving forward, and that appears to be what it is doing right now.”