The legal risks and practical considerations of digital asset blacklisting

Opinion Share Share this article Copy link X icon X (Twitter) LinkedIn Facebook Email The legal risks and practical considerations of digital asset blacklisting When digital assets are frozen, holders can suddenly be deprived of access to their legitimate assets or income. Here’s what to know to keep your digital holdings safe. By Galen Kast , Emma Howard | Edited by Betsy Farber May 6, 2026, 3:30 p.m. 4 min read Make preferred on (GaryAlvis/Getty Images) U.S. prosecutors have become increasingly aggressive in freezing digital assets believed to be traceable to illicit activities such as money laundering, “pig butchering” schemes, sanctions violations, and other financial crimes. Digital asset freezes take on a new dimension, however, when the freeze is voluntarily initiated by the issuer at the government’s request, bypassing the legal protections of a traditional asset seizure. In such instances, digital asset holders are often caught off guard, unaware that their funds are allegedly tainted and suddenly deprived of access to assets or income acquired through legitimate means. Traditional asset seizures In traditional financial crime investigations, the federal government’s authority to restrain or seize assets is governed by established legal and constitutional safeguards. Law enforcement typically must demonstrate a connection between the property and alleged criminal activity and obtain judicial authorization, such as a seizure warrant, before restricting access to those assets. Seized assets are then subject to the federal forfeiture regime, which operates through overlapping authorities, including civil forfeiture under 18 U.S.C. §§ 981 and 983, and criminal forfeiture under 18 U.S.C. § 982. Digital asset blacklisting Voluntary digital asset freezes represent a departure from traditional seizure processes. Rather than obtaining judicial authorization, law enforcement may request that an issuer freeze or blacklist specific wallet addresses. This practice has been reinforced by the GENIUS Act, which requires stablecoin issuers to maintain the technical capability to freeze, burn, or otherwise restrict tokens to comply with law enforcement directives. For affected digital asset holders, recourse through the stablecoin or other digital asset issuer is often limited because those issuers generally defer to the requesting government agency and do not know the underlying basis for the freeze. As a result, individuals and entities whose assets have been frozen typically must engage directly with the relevant governmental authority to seek relief. These challenges are compounded by two defining features of blockchain systems: pseudonymity and traceability. While wallet addresses do not inherently reveal the identity of their owners, blockchain transactions are publicly visible and can be traced across multiple transfers absent the use of mixers or other privacy-enhancing services. Law enforcement agencies thus routinely use blockchain forensic tools to follow the movement of funds originating from wallets suspected of involvement in illicit activity. At the same time, tracing funds across a decentralized network introduces significant uncertainty due to wallet pseudonymity. Although investigators may identify an initial source of illicit activity, they are often unable or choose not to expend the resources required to differentiate between downstream wallets controlled by individuals who are involved in the criminal scheme and those controlled by innocent bystanders who have unwittingly received the allegedly tainted funds. In our experience – including the successful unlocking of tens of millions of dollars in wrongfully frozen funds – it is not enough to point to the number of transactions, or “hops,” between the upstream illicit activity and the downstream frozen wallet. Government agencies will instead seek to understand how and why the funds were acquired and demand contemporaneous documentary evidence of the legitimacy of the transactions – unfairly but unmistakably shifting the burden of proof from the investigating agency to the digital asset holder whose funds have been frozen. Simply put, U.S. law enforcement’s approach is to freeze first, and ask questions later – and then to require owners of the frozen digital assets to prove their innocence to get their funds back. This tactic, combined with U.S. law enforcement’s expansive view of U.S. jurisdiction, puts all holders of stablecoins or other digital assets anywhere in the world at risk, whether they unwittingly acquired the assets five, 10, or even 20 hops downstream from illicit activity. Practical tips for stablecoin issuers and those affected by stablecoin freezes Notwithstanding the challenges involved, participants on both sides of governmental digital asset freeze requests – both issuers and holders – retain a variety of ways to protect themselves: Individuals and entities affected by digital asset freezes When a wallet is frozen, the window to respond effectively can be narrow, and early missteps can be difficult to unwind. To minimize these risks, we recommend digital asset holders: Engage counsel with experience not only in criminal defense and engaging with governmental agencies, but also specifically in digital asset matters, digital asset transactions and tracing. Assemble a clear factual record: how the funds were acquired, the purpose of the transactions, and any due diligence performed on counterparties. For entities, this should also include relevant internal policies governing digital asset use. The objective is to present a coherent and well-supported account demonstrating that the funds were obtained and used for legitimate purposes, without knowledge of any underlying upstream illicit activity. Consider a proactive approach. In some cases, it may be advantageous to engage proactively with the government agency responsible for the freeze, rather than waiting for further action. Early engagement, if carefully handled, can help shape the narrative before the government’s speculative assumptions solidify into hardened narratives. And of course, exercise caution. Communications with issuers or investigators may carry legal consequences, and statements made without a full understanding of the facts or legal posture can complicate efforts to secure the release of funds. Digital asset issuers To reduce exposure to civil litigation by users who believe their assets have been improperly frozen, digital asset issuers can: Adopt clear, consistent procedures when responding to governmental freeze requests, including how and whether issuers respond to user requests for information. Maintain an internal policy governing when and how such requests are honored, particularly where the request is not supported by a court order or other compulsory process. Make clear in the user terms of service or other documentation that the issuer complies with governmental freeze requests, including those that are not accompanied by a court order or other compulsory process if applicable. Maintain a record of all communications with governmental agencies or users in connection with specific freeze requests, and the basis for effecting the freeze. Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates . More For You The government should promote innovation, not punish it By Thien Ho | Edited by Betsy Farber May 4, 2026 District Attorney of Sacramento County, Ho argues that ambiguous rules and enforcement practices, such as those for crypto, lead to confusion, rather than seeking clarity in the law to further growth. 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