Can you Freeze or Confiscate Someone’s Crypto?

The obvious answer to this may feel like an emphatic no. After all, how can something be described as ‘decentralised’ if a single entity can control it?! However, blockchain technology is nuanced and it is in fact possible to freeze and confiscate crypto on certain blockchains….

Who has the private key?

Likewise if you’re storing your crypto with a custodian or on an exchange, then as they have the private key, they have control over your ability to withdraw or move these funds. Should you fall prey to an exit scam, the exchange being hacked, or should a regulators or law enforcement demand it of the service, then you’ll likely find access to your funds blocked.

It’s therefore important to maintain control of the private key for your funds and keep this safe. However, assuming you’ve got control of the private key, there are still ways your crypto can be frozen or confiscated …

Bitcoin

However, whilst this is conceivable it is incredibly unlikely as it would require mob-like collusion of miners at a grand scale (as well as miners knowing which addresses are under your control). Should this occur then the bitcoin project probably has more existential problems to deal with!

Ethereum

A notable example of this is the ERC-20 token Tether, USDT, which hit headlines back in July for blacklisting a number of accounts. They were able to do this because the contract for their token included a specific ‘blacklist’ feature which blocks transactions to or from any listed accounts.

This isn’t a standard feature within ERC-20 tokens and therefore is a deliberate design choice for the token creator to include.

Stellar and Ripple

This is possible because for an asset to be issued on these blockchains there must be a ‘real world’ deposit with what’s known as an Anchor (Stellar) or a Gateway (Ripple). As such if I want to issue my TaraCoins on these blockchains then I may deposit them with a well known exchange -such as Bitstamp. Bitstamp will then issue x TaraCoins on the blockchain and provide a trustline (Stellar : Ripple) with me for TaraCoins, this allows me to trade, receive and hold them.

However should my anchor or gateway remove this trustline, then my TaraCoins will be blocked and I’ll be unable to move them from my account — even back to the anchor/gateway.

XRP has two different types of freeze functionality;

- Inidividual Freeze: Freeze one counterparty
- Global Freeze: Freeze all counterparties


https://xrpl.org/freezes.html#:~:text=XRP%20cannot%20be%20frozen.,financial%20institution's%20terms%20of%20use.

However what’s important to note here is that the TaraCoins issued on the Stellar or Ripple blockchains are a virtual representation of the ‘real’ TaraCoins held with Bitstamp. As such the ownership of the ‘real’ assets remain with Bitstamp throughout and therefore the on-chain freezing is just a representation of the control they have off-chain.

EOS

However, what is possible is that a block producer may decide not to process certain transactions or for certain addresses — they can even be elected on this promise (and if they break it they may not be elected again). This is what happened in 2018 when a number of BPs collaborated to block transactions for 27 accounts: https://www.coindesk.com/eos-blockchain-arbitrator-orders-freeze-of-27-accounts

This caused some furore within the community as it was not unilaterally felt to be the correct action to take, however it is a design feature within the EOS mining protocol and so completely within the power of BPs to do.

There may be other protocols which allow the freezing or confiscation of crypto-assets — if you know of any, please do add them in a comment!