Stablecoins Vs. US Sanctions: How Do Circumvention Mechanisms Work With Tether (USDT)?

To begin with, let's imagine a businessman who has fallen under US sanctions. A sanctioned businessman is trying to buy a sanctioned bicycle from a sanctioned country and make it non-sanctioned in the place where it is located. How to make it non-sanctioned? We are not interested in this story. What we are interested in is how financial transactions will take place.

How will the businessman continue to make international transfers?

He or she will probably open shell companies, for example, in Dubai, because the UAE is now very similar to Switzerland and tries to stay out of someone's business unless that someone is showing off.

These shell companies should be linked to some not the cleanest bank, preferably not legally located in Dubai (only a branch). Let's call it X-Bank.

Then transfer to some Caribbean country, i.e. to an offshore zone, the money for the under-sanctioned bike to "Y-Bank", which is linked to shell companies on the other side.

Let's take a closer look at the transaction

To be able to make a wire transfer in U.S. dollars for a bicycle, "X-Bank" needs to have an account at a large U.S. correspondent bank, such as Goldman Morgan. Similarly, the bank that accepts "Y-Bank" transactions must have accounts with a US correspondent bank.

A Correspondent bank is a bank that acts on behalf of another bank (client bank) to execute financial transactions, including international transfers. In the case of dollar transfers, the correspondent bank is usually located in the U.S., allowing it to conduct dollar transactions directly.

Technically, when a sanctioned businessman bought a sanctioned bike for dollars from a sanctioned country through shell companies that work with not the cleanest banks, all transactions took place inside the US.

Bottom line. Everything is very complicated. There are a lot of legal risks. True, sanctions continue to be easily circumvented traditionally.

How is this done through the USDT?

If a sanctioned businessman uses USDT, the transactions would take place on the USDT network, and correspondent bank accounts would not need to be used. The entire transaction with live money would occur inside Tether's balance sheet, which is the issuer of USDT. It turns out that dollars don't move anywhere from a legal standpoint.

Even though USDT addresses are blocked as part of sanctions, they are still very shallow and too pinpointed. Transactions can be made to a large number of addresses at once and then transferred through crypto bridges, where they will eventually be lost. You can even pull funds from multiple wallets to centralized sites and take them anywhere.

To stop transfers through USDT, US authorities would have to interact directly with Tether, but the company is too big to collapse. You can't walk into an organization with $100 billion in net assets and $100 billion in liabilities and start shaking it down. A lot of money, companies, and lives are tied up in Tether.

Could Tether start banning addresses by location? Yes! Tether is a smart contract that allows the developer to freeze any amount of USDT in any wallet.

However, Tether (USDT), like other cryptocurrencies and tokens running on blockchain platforms, does not have a built-in mechanism to track the geolocation of wallet addresses in its smart contracts.

Smart contracts, including those used by Tether, operate based on the inputs they receive and the rules encoded within them, without access to external data such as the physical location of users, unless users provide such data through an off-chain mechanism and then transmitted to the blockchain via an oracle.

If a system in which users voluntarily associate their wallet addresses with geolocation and this data is stored off-chain, then the oracle could provide this data to the smart contract. However, this method relies heavily on user participation and honesty.

It turns out that if the businessman is under sanctions, the elementary knowledge of changing internet traces, which every user knows, makes him or her elusive to US sanctions, allowing him or her to make settlements right under the noses of US regulators.

Just 2 levels of encryption can permanently hide traces of an account's origin, so it's unclear how to freeze entire locations and countries. Prohibiting Tether from interacting with a sanctioned jurisdiction is possible, but not for USDT users.

More importantly, even if user data is collected by oracles and transferred to the blockchain, it would legally destroy Tether. All those companies that collect any user data should, in theory, be responsible for that data. How Tether will be able to protect user data is unknown, which would make it automatically banned in most jurisdictions on planet Earth.

Conclusion

The upshot is that Tether and other stablecoins are safe in terms of sanctions risks for those who know how to maintain their privacy. This continues to keep the door open for any sanctioned individuals, organizations, and countries to interact with the US financial system.

The above reduces the legal risks of using all stablecoins, as if you are not committing criminal activity, no one will block your address point by point, nor will there be a mass blocking.

P.S. All characters are fictitious, and the story is provided for informational purposes only.