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?

The simple rule with bitcoin, and all other cryptocurrencies, is that ownership of the private key dictates control of the associated funds. Therefore if you give, or someone takes, your private key then you’ll likely lose access to your crypto funds.

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

As noted above, if you have control of your private key then you can be pretty safe in the knowledge that no one can seize your bitcoins. However, it is conceivable that miners could collude to block any attempted transactions to or from addresses known to be associated with you. This would not remove these bitcoins from your control but would effectively render them frozen since you would not be able to move them to another address.

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

Whilst the Ethereum blockchain itself doesn’t offer the ability to freeze the native asset ETH, the existence of smart contracts on top of the protocol allows developers to create specific rules for their own tokens — which may include the ability to freeze or blacklist funds.

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

Like the Ethereum blockchain, both the Stellar and Ripple blockchains have a native asset, XLM on Stellar and XRP on Ripple, as well as the ability for other issued assets to be transferred across the chains. Similar to Ethereum, there is no inherent ability for the native asset to be frozen or controlled by a third party — unless they have control of the private key — however it is possible for an asset issued on these blockchains to be frozen.

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

One important factor to note between EOS and the other blockchains mentioned is that it employs Delegated Proof of Stake for its consensus mechanism. As such, unlike Bitcoin and Ethereum where anyone can become a miner and race to successfully mine the next block of transactions, instead you must put yourself forward as a candidate to become a block producer (BP). Every 126 seconds a new group of 21 block producers is chosen to mine the next blocks in a pre-determined order. This is a democratic process whereby all BPs are publicly known and EOS holders vote with their EOS for the block producers they want to be included in the next group.

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!