US Treasury Seeks Power to Freeze Crypto Assets Without Warrant

US Treasury Proposes Sweeping Powers to Freeze Digital Assets

The U.S. Treasury Department has officially requested that Congress grant it the legal authority to freeze digital assets without a warrant, a move privacy advocates argue could create an unprecedented financial surveillance net for decentralized finance (DeFi). The proposal, detailed in a 32-page legislative request released on March 9th, targets the burgeoning stablecoin market, which currently holds over $262 billion in systemic value.

The “Hold Law” Proposal: A Paradigm Shift in Financial Surveillance

At the heart of the Treasury’s request is the establishment of a “digital asset-specific hold law.” This would provide financial institutions and crypto exchanges with a legal “safe harbor” to temporarily freeze user assets if an algorithm flags a transaction as suspicious. Crucially, this would allow for asset freezes without the need for a formal warrant, court order, or the risk of civil liability for the institutions involved.

Currently, under the Bank Secrecy Act (BSA), financial institutions must file a Suspicious Activity Report (SAR) with FinCEN for potentially illicit transactions. However, they are not explicitly authorized to freeze funds without a court order or sanctions authority, and doing so incorrectly could expose them to significant legal repercussions. The proposed hold law would remove this liability, effectively deputizing exchanges as private enforcement arms of the government.

“If their internal AI monitoring software flags your transaction as high risk, well, they could lock your account immediately. No judge, no subpoena, and no due process required,” explained Lewis, host of Coin Bureau, in a recent analysis. This raises concerns about due process, as platforms would be legally prohibited from informing users that their accounts are frozen due to an investigation, a restriction known as the “tipping off” prohibition under existing SAR rules. Users could find their assets locked with no explanation, facing a “generic customer service wall of silence.”

Justification: Combating Illicit Finance and Stablecoin Crime

The Treasury’s proposal is framed as a necessary response to the increasing use of cryptocurrencies in illicit activities. The report cites data from blockchain analytics firms, highlighting figures such as:

• An estimated $16.1 billion moved through crypto by Chinese-language organized crime networks in 2025.
• At least $2.8 billion stolen by North Korean cybercriminals in digital assets over the past two years.
• A $1.5 billion hack of the Bybit exchange, cited as evidence of failing regulatory perimeters.

According to TRM Labs, illicit entities received approximately $141 billion in stablecoins in 2025. While this figure represents less than 1.2% of the roughly $4 trillion in total stablecoin activity observed last year, the Treasury’s proposed solution appears to treat the entire ecosystem as a potential threat vector.

The report argues that current law enforcement mechanisms are too slow to combat cross-border crypto transfers effectively. By the time investigators obtain a subpoena, stolen funds can be quickly laundered through mixers, swapped into stablecoins, and moved across multiple blockchain networks.

Expanding Surveillance to Decentralized Finance (DeFi)

Beyond the implications for centralized exchanges, the Treasury is also proposing an aggressive expansion of financial surveillance into the DeFi space. Recognizing that users may migrate to decentralized platforms to avoid stricter controls, the Treasury aims to extend its reach through amendments to Section 311 of the USA PATRIOT Act.

Historically, Section 311 allows the Treasury to designate foreign jurisdictions or banks as money laundering concerns, effectively cutting them off from the U.S. dollar system. However, this power has traditionally been limited to traditional correspondent banking relationships. The Treasury is now seeking to introduce a “sixth special measure” that would enable them to designate specific smart contract addresses, DeFi protocols, or cross-chain bridges as primary money laundering concerns, irrespective of any connection to a correspondent bank.

This move follows the Office of Foreign Assets Control’s (OFAC) sanctioning of the Tornado Cash smart contracts in August 2022. While a U.S. Court of Appeals later ruled that immutable smart contracts could not be legally sanctioned as property, the Treasury is now seeking direct congressional authority to achieve similar outcomes.

“If these powers become law, they would represent the single largest expansion of financial surveillance authorities since the Patriot Act was originally passed in 2001,” warned Alex Thorne, head of firmwide research at Galaxy Digital. “This isn’t just a regulatory tweak. It is a legislative kill switch for permissionless finance.”

Wall Street’s Role and the Rise of Permissioned DeFi

The Treasury’s proposals align with a broader trend of Wall Street integrating crypto assets into traditional financial frameworks, often through permissioned DeFi solutions. Projects utilizing standards like ERC-3643 embed Know Your Customer (KYC) and Anti-Money Laundering (AML) verification directly into smart contracts. These protocols require every wallet to be whitelisted and verified before it can send or receive tokens, and crucially, include built-in capabilities for administrators to freeze assets or claw them back.

Companies like Tomega, which powers over $32 billion in tokenized assets using ERC-3643, and institutions like the DTCC, have embraced this standard. BlackRock’s recent listing of a $2.4 billion tokenized U.S. Treasury ETF, which automatically rejects any transaction from an un-whitelisted wallet, exemplifies this shift towards controlled, permissioned environments.

The concern is that the proposed Treasury hold law would provide legal cover for these permissioned systems. If an exchange or token issuer freezes a custodial account under the safe harbor, it could simultaneously trigger the built-in freeze functions within the underlying smart contracts. This integration blurs the lines between centralized control and decentralized technology.

Market Reaction and the Privacy Premium

The market appears to be pricing in this potential shift towards greater control and reduced privacy. While major cryptocurrencies like Bitcoin and Ethereum have struggled to reach new all-time highs, privacy-focused coins have seen significant gains. Monero (XMR), for example, has surged over 63% in the past year, peaking near $800 in January. This phenomenon, dubbed a “privacy premium,” suggests that capital is actively moving away from transparent blockchains in search of censorship resistance.

“The institutional adoption of crypto was always going to come with a regulatory cost. We traded the cipher punk ethos for spot ETFs and Wall Street liquidity. But this proposal proves that the endgame isn’t just regulation. It is absolute control,” Lewis concluded. The question remains whether the crypto community will recognize and resist what is perceived as a move towards a fully controlled DeFi ecosystem before the doors lock from the outside.

Source: Wall Street Wants A Fully Controlled DeFi (YouTube)