The HRF believes that governments can easily adapt against stablecoins. The organization also considers it very risky to concentrate trust in a centralized issuing entity.
The Human Rights Foundation (HRF) recently published a report focused on the privacy of stablecoin users, in which is considered the main risks of using these digital assets. It especially referred to the possibility of tracing the movements of funds and the opportunity to block funds held by issuing entities.
The report focuses mainly on cases where people go to stablecoins to overcome restrictions on foreign currencies in their countries. In those contexts, the text says that governments can equip themselves “with the necessary tools to track and punish offenders.”
In this regard, the HRF refers to cryptocurrency market analysis sites that track the activity of these assets in their respective blockchains. The organization claims that, by using any cryptocurrency that works in a public blockchain, a stablecoin user may be leaving traces about its use, the amount owned, the amounts transferred in the past, and the people with whom transactions have been conducted.
The note argues that even careful users who do not publicly disclose their addresses are at risk when making transactions through exchange houses, both to make payments or purchases and to receive payments for their own services.
Likewise, issuing entities of stablecoins such as Tether, USDC, TUSD, PAX or BUSD have the power to freeze addresses to block funds. According to the foundation, focused on freedom of expression and human rights, that is a “particularly useful” capacity in cases of hacking and theft of funds. However, it could represent a great disadvantage, since the trust that must be placed in the issuing entity in order not to act maliciously is much greater.
According to the report, the investigation conducted showed only 16 cases of frozen addresses in the case of Tether. The HRF claims to ignore the reasons why those addresses were frozen but argue that many of these cases occurred shortly after withdrawal from an exchange house. From that, the text concludes that the addresses may have been frozen in response to hacks against users of such exchange houses.
Risks Associated with Price Anchoring
On the method used for a stablecoin to maintain its price with respect to the dollar, the report notes some risks. In particular, these risks could be considered to cause an abrupt fall in the value of certain anchored currencies. Especially, it refers to those whose anchor depends on a reserve fund that supports, in physical funds, the issuance of the cryptocurrency.
According to the organization, this makes the user depend on trust in the issuing entity. In cases such as Tether, USDC, Paxos or the stablecoin of the Binance exchange house, these are centralized issuing entities and processes.
In fact, the lawsuit filed in New York against Bitfinex and Tether (its affiliated firm) led to the disclosure that the company showed a deficit of 850 million physical US dollars from its reserves, which support the USDT anchor, and still have not been recovered. Before the support of the stablecoin was extended with reserves in assets other than the US dollar, there was 1.35 Tether in circulation for every physical US dollar available in the reserve. In other words, the support of 1 Tether at 1 US dollar was not complete, according to HRF.
By Willmen Blanco