A lawsuit filed against Tether in the Southern District of New York raised questions about how stablecoin issuers responded to law enforcement requests and exercised control over user funds.
As Consensys lawyer Bill Hughes shared on October 15, Riverstone claimed Tether froze eight of its wallets containing $45 million on April 4, after receiving an informal request from a Bulgarian police department.
The company alleged Tether failed to provide legal documentation justifying the freeze and directed Riverstone to contact Bulgarian authorities, who did not respond.
The plaintiff alleged that Tether falsely marketed USDT as a reliable and liquid stablecoin while maintaining centralized control through smart contracts, which allowed for wallet freezing and address blacklisting.
Riverstone stated that Tether advertised USDT as fast, stable, and free from banking delays, while exercising unilateral control that is inconsistent with these claims.
The firm also asserted that Tether violated international legal protocols by freezing assets based solely on a local Bulgarian police request without proper judicial or diplomatic process.
The complaint claimed Tether failed to act in good faith or provide due process before restricting access to funds.
Three Legal Claims Targeted Tether
The lawsuit included three causes of action against Tether. The first alleged breach of fiduciary duty involved Tether’s alleged obligations as issuer and custodian of USDT, including safeguarding assets, ensuring liquidity, and maintaining the transferability of USDT.
The second claim asserted unjust enrichment by alleging Tether profited from reserve interest while denying Riverstone access to its assets during the freeze period.
The third cause of action claimed conversion, stating that Tether exercised unauthorized control over Riverstone’s property by freezing wallets and restricting fund transfers.
A Bulgarian law firm published an article describing how to unfreeze Tether addresses after the company responded to informal requests.
The firm stated that Chinese authorities have requested numerous USDT freezes in recent months, while the FBI has traditionally requested bans on addresses associated with suspicious activities.
The law firm noted many freeze requests lacked legal justification, and Tether could not verify the authority and legality of each foreign security agency. The article stated this led to Tether honoring an overwhelming number of requests.
Industry Debate Over Freezing Standards
Hughes stated that how to freeze stablecoins represented a critical issue as the industry entered an era of stablecoin proliferation.
He noted that members of the crypto security community criticized Circle for failing to stop laundered funds when it lacked a legal process.
Hughes stated that Tether appeared more accommodating to informal law enforcement requests, which security and fund recovery professionals supported. The lawyer noted this approach carried the risk of blocking funds belonging to non-scammers and non-hackers.
Banks and financial services block or seize funds only pursuant to a prescribed legal process, with protections against customer complaints when proper procedures are followed.
Hughes stated that no similar framework existed in cryptocurrency markets. He also predicted Tether would return the funds and moot the case if Bulgarian authorities backed down or provided proper documentation to make the freeze legitimate.
However, blockchain investigator ZachXBT reviewed the addresses and detected “several hops on-chain from ponzi investment scams like BETL, Pegasus Ride, LSSC.”
He added that the Riverstone shell company from Hong Kong frequently chainhops back and forth from Tron, Polygon, and Ethereum via Bridgers.
Considering this backdrop, ZachXBT stated:
“There’s no way you ‘accidentally’ associate $44.7M with tainted addresses onchain. It’s unfortunate we’ve reached the point where organized crime is bold enough to fight freezes via sketchy lawyers due to antiquated laws.”
Tether Settled Celsius Bankruptcy Case
In addition to the recent lawsuit, the Blockchain Recovery Investment Consortium (BRIC) announced on October 15 that Tether paid $299.5 million to the Celsius Network bankruptcy estate.
The consortium, a joint venture between GXD Labs and VanEck, filed an adversary proceeding in August 2024.
The lawsuit was filed in the United States Bankruptcy Court for the Southern District of New York. The claims arose from collateral transfers and liquidations occurring before Celsius’s July 2022 bankruptcy filing.
GXD Labs Managing Partner David Proman stated the consortium achieved a timely resolution of Celsius’s adversary proceeding and related claims against Tether.
The BRIC was created in early 2023 to maximize recoveries in complex digital asset bankruptcies.
The consortium was appointed as the Complex Asset Recovery Manager and Litigation Administrator by Celsius debtors and the Unsecured Creditors’ Committee in January 2024, following Celsius’s exit from bankruptcy protection.
The BRIC continued managing a portfolio of illiquid assets and litigation assets for the bankruptcy estate’s wind-down.