The USDC blacklist incident raises concerns in the Decentralized Finance industry

Recently, a centralized stablecoin issuer blacklisted a certain address, an action that has sparked widespread discussion in the cryptocurrency world, especially in the thriving Decentralized Finance sector.

In mid-March this year, the cryptocurrency market suffered a heavy blow due to the impact of the COVID-19 pandemic, and the decentralized stablecoin DAI was no exception. To cope with this situation, the MakerDAO community decided to introduce a stablecoin pegged to the USD as collateral. However, unexpectedly, the issuing institution of a certain stablecoin recently suddenly blacklisted an address and froze stablecoins worth USD 100,000 on that address in accordance with the requirements of law enforcement.

According to a spokesperson for the issuing agency, they are unable to provide specific details regarding the blacklist, and the related freezing operations occurred in mid-June, which is also when the address was first blacklisted. The issuing agency stated that they can confirm whether certain addresses are blacklisted at the request of law enforcement but cannot comment on the specifics of the law enforcement requests and can only execute court orders that are binding and have appropriate jurisdiction.

What is certain at this point is that once an address is blacklisted, it will no longer be able to receive the corresponding stablecoin, and all related tokens controlled by that address will be frozen and cannot be transferred on-chain.

This incident has raised questions within the industry about the degree of decentralization of DAI. The CEO of a certain DeFi lending protocol pointed out that if stablecoins are locked in the Maker Vault and the issuing entity uses the blacklist feature to lock the funds, it may undermine the peg of DAI to the US dollar.

Some industry insiders believe that while DAI, as a USD-pegged stablecoin, can effectively withstand financial risks, the underlying DeFi protocols may be affected and compromised if the collateral can be blacklisted.

Although cryptocurrency companies operate in a relatively loose environment, they still need to comply with the law. A legal expert stated on social media that this incident has made people realize that the blacklisting of stablecoin addresses has turned from theory into reality, bringing actual risks to the Decentralized Finance industry.

It is worth noting that this is not the first occurrence of a similar situation in the crypto industry. According to blockchain developers, another large stablecoin issuer blacklisted 39 Ethereum addresses as early as November 2017, involving amounts of up to several million USD.

The practice of these centralized companies choosing to cooperate with law enforcement and unilaterally blocking relevant transactions seems to contradict the decentralized principles advocated by cryptocurrencies. However, according to the policy documents of a certain issuing organization, failing to do so could pose a threat to their network, and thus they must comply with court orders to blacklist the relevant addresses.

Industry experts believe that a small amount of frozen transactions may not shake the market position of stablecoins, but if this practice becomes the norm, it could set a bad precedent. If stablecoins with "backdoors" are widely adopted, regulators may exert greater influence.

Some DeFi investors have stated that there are still centralization issues in the industry. They pointed out that if the issuer of a stablecoin is a centralized entity, it could take various measures, such as blocking transactions, freezing assets, and so on. Some investors prefer projects that are more decentralized or claim to be decentralized stablecoins that are not controlled by the issuer.

Nevertheless, some experts believe that this event highlights the ongoing growth in demand for Bitcoin globally. Although Bitcoin remains volatile and is not ideal as a savings tool, if one needs to choose an indivisible and unstoppable value transfer tool, Bitcoin is still the preferred choice. Of course, this is on the condition that trading on centralized exchanges is avoided.