Why Tether's Iran problem is a bank partner problem

• Key insight: Tether freezes sanctioned wallets when law enforcement asks it to, and the subcommittee's complaint is that asking is the only thing that works.
• Expert quote: Any argument for bank-grade screening "must grapple with the sad reality that bank-grade censorship often fails at stopping exact illicit flows like this," said Omid Malekan of Columbia Business School.
• Forward look: Sen. Richard Blumenthal asked the Treasury Department and the Justice Department to investigate Tether's sanctions and anti-money-laundering compliance.

Overview bullets generated by AI with editorial review.

Israel's counter-terror financing bureau flagged 39 cryptocurrency addresses in June 2023 as tied to a money launderer for Hezbollah, the Iran-backed Lebanese militia. Tether, which issues the world's largest dollar-pegged stablecoin, froze five of them.

The other 34 kept moving money for nine more months. More than $34.6 million flowed through before the company shut them down.

That episode sits near the center of a report that Sen. Richard Blumenthal, D-Conn., released Monday, written by the minority staff he leads as ranking member of the Senate Permanent Subcommittee on Investigations.

The report, "Tethered to Terrorism: Crypto & Iran's Shadow Banking Network," said Tether's dollar-pegged token USDT has become Iran's preferred way to move money around U.S. sanctions.

The report's core allegation (that Tether aids sanctions evaders and money launderers) is not new, and it's a standing hobby horse for Blumenthal.

The new development is Blumenthal sending the findings to Scott Bessent, the Treasury secretary, and Todd Blanche, the attorney general, asking both departments to investigate Tether's sanctions and anti-money-laundering compliance.

He also asked each to say whether it had already narrowed, paused or closed an inquiry into the company. Both letters cite news reports placing such an investigation at the Justice Department around October 2024, and neither department has confirmed one.

Blumenthal's campaign against Tether matters to banks getting into the stablecoin business because it concerns the legal and political exposures of the single largest stablecoin player.

It also matters because of the compliance burden the report could create for banks that offer custody of Tether tokens.

Tether's domestic token, USAT, comes from Anchorage Digital Bank, N.A., a nationally chartered bank that Tether partly owns after a $100 million investment. Blumenthal's letters do not name Anchorage; the report concerns USDT, which Anchorage Digital does not issue.

Blumenthal's subcommittee analyzed 846 wallets that either Israel's National Bureau for Counter Terror Financing or the Treasury Department's Office of Foreign Assets Control, or OFAC, had sanctioned or targeted for seizure between June 2021 and August 2026.

Of those, 84% transacted exclusively or nearly exclusively in Tether's popular USDT stablecoin, according to the subcommittee's analysis.

The report calls its own findings preliminary, carries no Republican signature and does not publish the underlying addresses, so nobody outside the subcommittee can reproduce the results.

The freeze rule that takes effect in January

One effect of the GENIUS Act is that, starting in January 2027, it will be illegal for companies that deal in digital assets (including banks that offer custody, conversion or trading of stablecoins) to offer certain tokens.

Specifically, a company cannot offer a digital asset (such as a stablecoin) from a foreign issuer unless that issuer can and will obey lawful orders to freeze that digital asset.

Tether is one of those foreign issuers; it is based in El Salvador. It is also popular with sanctions evaders and, by the subcommittee's account, slow to freeze wallets that governments have already flagged.

The law also lets the Treasury secretary declare an issuer (foreign or domestic) noncompliant and bar American platforms from trading its token. The report released Monday gives the secretary a documented case of alleged noncompliance roughly four months before that power takes effect.

Tether's answer

On Monday, Tether published a post defending its asset freezing practices, though it never mentions the report.

The company has acted to freeze roughly $550 million in Iran-linked assets in 2026 alone, according to the post, including more than $344 million in April, when it acted on information from OFAC and U.S. law enforcement. It also froze more than $130 million in July.

"Tether has consistently demonstrated that USDT is not a haven for sanctioned actors, terrorist organizations or criminal networks," Paolo Ardoino, the company's chief executive, said in the Monday statement.

Public blockchains give authorities visibility that cash does not, he said, "and Tether can act when credible information is provided by law enforcement."

That reactivity is what Blumenthal calls inadequate.

"Solely relying on the reactive freezing of wallets after designations will not work," reads the report, which faults Tether for instances where it did not freeze assets despite public information suggesting specific addresses were evading sanctions.

Tether's statement does not address wallets the subcommittee says are still unfrozen.

Tether did not immediately respond to a request for comment on those findings.

The broader debate: Who decides to freeze assets?

Blumenthal wants Tether held to the same standard to which the law holds banks, which must actively monitor for money laundering and stop it when they have reason to suspect it is happening.

Issuers "should proactively monitor their partners and their partners' clients for high-risk activities," the report said.

However, that regime cuts against the civil-libertarian streak that underlies digital assets.

Blumenthal's findings "don't change the calculus" of the argument that issuers should not freeze beyond what legal process requires, according to Omid Malekan, who teaches a course on blockchain and cryptocurrencies at Columbia Business School.

Anyone making the case that tighter screening would cut illicit stablecoin flows without adverse trade-offs, he said, "must grapple with the sad reality that bank-grade censorship often fails at stopping exact illicit flows like this."

He told American Banker he had not had time to digest the report or check its claims, and that he is "not informed enough to argue one way or another" about whether Tether did enough in these cases, hence his objection concerns the broader debate, not the findings.

Asking a private company to decide who gets cut off invites discrimination, Malekan said, and the line between a terrorist financier and a legitimate exporter in a developing country is thinner than it looks.