The Stablecoin Market Has Permanently Changed

Centre has blacklisted an address with a $100,000 USDC balance this week as reported by The Block Crypto. Is this important?

This is enormously important in my opinion for the stablecoin market. Although it was speculated two years ago that USDC may blacklist a certain Ethereum address, it didn't happen (to my knowledge) until now due a court order to CENTRE, the issuer of USDC.

"Centre can confirm it blacklisted an address in response to a request from law enforcement. While we cannot comment on the specifics of law enforcement requests, Centre complies with binding court orders that have appropriate jurisdiction over the organization."

What does it mean for you?

• You think you own $10,000 of USDC earning interest in Compound or BlockFi

• You think it's your money and you can withdraw to spend or trade at any time.

Well, what if any court from around the world blocks:

• The Compound USDC address

• The BlockFi USDC address

• Your exchange USDC address

• Your wallet address

Game over. The money isn't yours anymore.

According to the Circle website:

The only circumstance where a transfer might fail to be executed by the USDC smart contract is when either the sender or receiver wallet address has been blacklisted. A global blacklist is maintained by the USDC smart contract, and this was implemented to comply with legal requirements such as a court order or global sanctions restriction. Reserves associated with USDC balances held on blacklisted addresses may be wholly and permanently unrecoverable.

I've read that the same blacklist mechanism exists for TUSD and USDT on Ethereum.

Risks that were theoretical in the past are completely real now. Exchanges, individuals, businesses all will have to consider the possibility their funds could be blacklisted based on legal requests and then the funds are forever frozen and gone. For decentralized money, that doesn't sound too decentralized to me.

What's next?

• DAI - The completely decentralized stablecoin from Maker is going to get a big boost most likely. Other coins that are decentralized and not subject to a central issuer will also likely start to grow in appeal.

• Centralized coins on chain that can't have blacklisting - I'm not sure if Bitcoin Cash can technically be blacklisted, I don't think so. If it can't handle blacklists, then coins like USDT and USDH on BCH SLP would likely grow in popularity.

• Projects/Companies that accept USDC as collateral - Are likely going to start questioning if the collateral is actually worth the $1 face value or some more highly discounted value based on the freeze risk.

Conclusion

For anyone that thought through possibilities of potential blacklisting of coins, it has now become very real. In my opinion, expect a thorough rethought of the whole stablecoin structure and perceived risk going forwards. It will be interesting to see how all of the market participants react and what changes happen going forwards.