Stablecoins and currency controls

Geopolitical tensions are on everyone's mind right now and an old friend asked me on LinkedIn whether a hypothetical government could use stablecoins as another weapon against a hypothetical target, with the target being a person, an issuer or even a government. The answer says as much about our current financial system as it does about stablecoins themselves.

First, we need to talk about sanctions. These days we only too often read that a person and an entity has been sanctioned and of sanctions as economic weapons. Here is how sanctions work in practice and we will look at the US. There is a department within the US Treasury, called OFAC (Office of Foreign Asset Control) that owns the so-called SDN (Specially Designated Nationals) list. This is the list of all individuals, entities and even countries object of sanctions. OFAC decides who goes on the list and when the list should be reviewed. For major or sensitive targets, OFAC works with the National Security Council. So, what happens after an entity has been sanctioned?

No financial institutions is allowed to have financial dealings with them. Sanctions compliance is a prerequisite to use US Dollars and with the dollar still being the backbone of the financial system no financial institution can afford to be sloppy on implementing sanctions. There are many more aspects to sanctions and sanctions compliance, but for the sake of this post this should be sufficient.

With the setting established, let's move to a few examples. We will assume that OFAC has recently added Entity A onto the SDN list. The Genius Act has established that each stablecoin issuer is subject to Anti Money Laundering regulations and therefore needs to comply with the sanctions list. OFAC went one step further and clarified that sanctions compliance is the same whether the currency is a cryptocurrency or a fiat currency (here and here). Therefore, every single stablecoin issuer now has to check if that entity is their customer and if it is, act accordingly. The action is very simple: every wallet on the chain associated with that entity is frozen.

Both Circle's USDT and Tether's USDC have mechanisms in place to act on additions to the SDN list, both of which have already been put to use. Around this time last year, Tether froze $27 million in USDT belonging to Garantex, a Russian crypto exchange, sanctioned by both the US and EU in one of the many sanctions packages deployed in response to Russia's invasion to Ukraine. Before that, back in 2022, it was Circle that froze the wallets tied to Tornado Cash.

It is a common misconception that cryptocurrencies are anonymous. While it is true that it is only the wallet address that is visible on chain, major stablecoin issuers now do perform KYC on their clients (the whole issue of privacy on the chain is worth its own post) so issuers are expected to know who actually holds their wallet. Even in cases where that information is not available transaction analysis can spot problematic behaviour tied to specific wallet which then enforcement agencies can request stablecoin issuers to block.

So, is it as simple as OFAC sends a request, the issuer turns on the switch and the wallet is frozen? Not quite. Every sanction professional will tell you that sanctions compliance is difficult with individuals and entities continuously finding ways around the problem. This is true within traditional finance where billions have so far been levied on financial institutions for poor sanction compliance. It is even harder within the world of stablecoins. A recent report by Range.org shows that only 36% of OFAC listed stablecoin addresses are in effect frozen.

Sanctions compliance on-chain is further complicated by the fact that the chain itself is transparent. As soon as the request to freeze a wallet is created, it is visible on the chain, before it's executed. This lag time, however small, gives an opportunity for the wallets to be emptied, which is why in the same report Range.org points out that thousands of frozen wallets have zero balance.

Then, of course, the world of stablecoins does not end with Circle and Tether. Algorithmic stablecoins are not regulated and therefore issuers do not have to comply with sanctions. But even in this case governments are not entirely powerless. The EU has for example in October 2025 passed a sanctions package that prohibits any transaction involving the A7A5 stablecoin across the EU, therefore sidestepping the entire problem of whether the stablecoin issuer will comply (it probably won't, given that this package is against punishment for Russia's invasion of Ukraine).

In conclusion, while cryptocurrencies are thought of as borderless currencies outside the grasp of government, which is indeed true for Bitcoin, stablecoins are a different kind of instrument altogether. They are centralised, regulated and therefore well within the grasp of national and supranational enforcement agencies.

Until next time,

Stable Sis

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