Tips to Safely Use Stablecoins and Avoid Account Freezing on Cryptocurrency Exchanges
Let's discuss the main reason for freezing money on a crypto exchange and methods that will help you avoid becoming a victim in this situation.
Few days ago, one of the main stablecoin issuers, Tether, has frozen $17.4 million USDT on addresses hosted on the Ethereum network. Thus, the total volume of stablecoins frozen by this issuer reached $806 million.
In the crypto market, where anonymity and decentralization play a key role, questions of the legitimacy and “purity” of stablecoins become especially relevant. Trading or holding stablecoins, especially those obtained from unknown third parties, can carry significant risks, including the possibility of your account being frozen by the exchange.
How to use stablecoins safely
Stablecoins are a type of cryptocurrency whose value is pegged to the value of a fiat currency such as the US dollar or euro. They offer a number of benefits, including price stability, ease of use and the ability to use them as a means of payment. However, like any other cryptocurrency, stablecoins come with risks.
One of the key risks associated with stablecoins is the potential for loss of funds. In the event of bankruptcy or fraud of the stablecoin issuer, you may be deprived of your funds. Therefore, it is extremely important to choose stablecoins issued by reliable issuers.
On December 13, the eight leading stablecoins—DAI, FDUSD, FRAX, GUSD, USDP, USDT, TUSD, and USDC—were analyzed by ratings agency S&P Global (Standard & Poor's), and each stablecoin was rated on a scale of 5 to 1 (5 — minimum value, 1 — maximum).
To assess the reliability of stablecoins, asset quality, governance, regulatory framework, redeemability, liquidation mechanisms, liquidity, dependence on technology and third parties, and track record were taken into account.
Finally, the most subtle, but no less important risk associated with stablecoins is the possibility of their use in illegal activities. Stablecoins are often featured on the darknet, where they are used to anonymously transfer funds, which is why they are likely to be labeled as "dirty".
What are dirty stablecoins?
Dirty stablecoins are stablecoins that have been used in illegal activities such as money laundering, terrorist financing, or drug trafficking. Such stablecoins may be flagged by exchanges and other financial institutions as being associated with illegal activity.
If “dirty” stablecoins that you received from third parties end up on the exchange, your accounts may be frozen. This means that you will not be able to withdraw your funds from the exchange or use them for trading. Additionally, you may be held liable for using dirty coins.
If you do not want your funds to become part of illegal activities, it is important to first verify the purity of stablecoins before using them.
TOP 6 ways to check stablecoins:
Stablecoin Source: Determine which wallet address the stablecoins are coming from. Check the reputation and legitimacy of the wallet. If stablecoins come from an exchange or reputable service provider, the risk is reduced.
Today, the easiest way to check whether a wallet is “clean” is to use the AMLBot service. Their simple and accessible Telegram bot can check the connection of any wallet with illegal activity in two clicks.
Those who plan to regularly use the service to check the legitimacy of transactions and assets can use AMLBot web applications . The application is also available for download in the App Store and Google Play.
The AMLBot service is one of the most popular in providing asset verification functions due to its ease and accessibility for the user, while alternative services are quite expensive.
Verification through blockchain services: You can also use blockchain analytics services such as Chainalysis, Elliptic, CipherTrace or Crystal Blockchain to trace the origin of stablecoins. These services can identify connections to suspicious addresses or transactions.
Sanctions Lists: Check to see if the addresses from which stablecoins are coming are associated with sanctions lists such as OFAC (US Office of Foreign Assets Control).
Smart Contract Review: If stablecoins are issued on smart contracts, ensure that the contracts have been audited for security and legitimacy.
Transaction history: Analyze the transaction history of stablecoins. Suspiciously large or unusual transactions may be a signal for additional scrutiny.
Risk Management Policy: Develop and maintain a strict risk management policy. This includes setting limits on the volume and frequency of transactions with stablecoins obtained from third parties.
How to increase the legitimacy and security of your stablecoins
We would like to take a closer look at this method of ensuring the legitimacy of stablecoins before listing them on the exchange by swapping stablecoins from one network to another, for example, exchanging USDT on the TRC-20 network for USDC on the ERC-20 network.
Trading USDT (Tether) to USDC (USD Coin) will change the type of stablecoin held in the wallet and will also create a new history for the USDC stablecoin on the Ethereum network. However, it is important to understand that such an exchange does not 'clear' the history of previous USDT transactions.
Key notes about this method:
Blockchain transactions remain unchanged: All previous transactions involving USDT are stored on the blockchain and are viewable through blockchain explorers. This includes the original transactions you made while receiving USDT.
New USDC Transactions: Once USDT is exchanged for USDC, new entries will appear on the Ethereum blockchain reflecting the purchase of USDC. These transactions will relate exclusively to USDC, without affecting the history of USDT.
Blockchain Analysis: Specialized blockchain analysis services can track transaction history and identify the relationship between old USDT and new USDC. This means that the purity of the history of new USDC may be questioned if previous USDT were associated with suspicious activities.
Exchange Rules: Before transferring USDC to an exchange, make sure it checks for compliance with KYC/AML standards. Exchanges may request information about the origin of funds, especially if large amounts are involved.
To summarize, while exchanging USDT for USDC may provide a “clean” history for USDC from the time of exchange, it is important to be aware of potential exchange and legal requirements regarding the origin of funds.
You should always act within the law and comply with regulations to avoid legal problems. As a true last resort, if you have concerns about the legitimacy of your stablecoins' history, consider consulting with a cryptocurrency and blockchain lawyer for professional advice.
