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Tether Freezes Wallets Linked to Terrorism in Israel, Ukraine: Correct Move or Fake Decentralization?

Published October 17, 2023 3:17 PM
James Morales
Published October 17, 2023 3:17 PM
Key Takeaways
  • Tether has frozen over $873,000 worth of stablecoins linked to illicit activity in Israel and Ukraine.
  • Following attacks in Israel, the use of cryptocurrencies to fund terrorism has risen up the political agenda.
  • Some lawmakers have used recent events to galvanize support for stricter crypto regulation.

The issue of terrorist funding has become a hot topic in the wake of the recent Hamas attacks on Israel and the ensuing conflict.

On October 16, Tether waded into the debate, announcing  that it has frozen 32 crypto addresses, containing over $873,000 worth of stablecoins that were found to be linked to illicit activity in Israel and Ukraine. But Tether’s critics argue that the firm’s ability to unilaterally freeze assets is hardly a good thing.

Decentralization and Security

Among diehard crypto-libertarians, stablecoins like Tether’s USDT represent a bastardization of the ethos of decentralization upon which the crypto movement was founded.

For its part, Tether has stated  that it supports “the growth and adoption of a decentralized financial system.” However, it acknowledges that its main product, USDT, is not a decentralized asset itself.

Rather, by retaining centralized control over its stablecoins, Tether erases one of the most popular features of decentralized cryptocurrencies like Bitcoin—the inability of any single entity to restrict their use.

Critics of decentralization have argued that Bitcoin and similar assets pose serious security challenges precisely because they make government or intergovernmental control nearly impossible. 

After all, while Tether can move to unilaterally freeze assets held by sanctioned actors, potentially helping to defund violent organizations around the world, no such option exists for Bitcoin.

On the other hand, supporters of decentralized technologies have argued that individual protocols should be apolitical and have criticized Tether — a private company— for taking sides by freezing certain users’ assets.

Recent Events a Boost for Anti-Crypto Lawmakers

The question of how to respond to the use of cryptocurrencies by criminal and terrorist groups has always been a divisive one. However, the debate has become even more heated in recent days as the use of crypto financing by Hamas has come under increased scrutiny.

In the ongoing battle between pro and anti-crypto lobbies, a renewed focus on the use of digital assets to finance conflict has served the interests of the latter. And some lawmakers have used the recent debate over terrorist funding to galvanize support for stricter crypto regulation.

For example, in a recent interview , Senator Elizabeth Warren argued that “the danger of crypto-financed terrorism is real and should be an urgent priority for Congress.”  The next day, she tweeted  that revelations surrounding the use of cryptocurrencies by Hamas should be a “wakeup call” for lawmakers and regulators.

While Warren and her allies have sought to take advantage of a wave of anti-Hamas sentiment to build support for their agenda, it is unlikely that they will win over their detractors.

After all, attempts to condemn decentralized cryptocurrencies due to their use by criminal networks aren’t new. Yet supporters of the technology have always insisted that their most reprehensible use cases don’t justify restrictive legislation that affects all users equally.

The Mainstreamification of Cryptocurrencies

Ultimately, the cypherpunk dream that Bitcoin may realize a fully decentralized economic system that cuts out state actors entirely doesn’t burn as brightly today as it once did.

As is often the case in the history of technology, on the path to mainstream acceptance, cryptocurrencies are in the process of having their initial revolutionary potential dialed back.

On a practical, day-to-day level, central banks and financial regulators aren’t going anywhere. And when it comes to bridging traditional finance with the fully decentralized world of Bitcoin and its peers, perhaps Tether, with its watered-down, pick-and-choose commitment to decentralization, has found a much-needed middle path.

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