How Tether uses its USDT 'recovery mechanism' to restore lost user funds

Last week, Tether provided a revealing glimpse into its power to "recover" a user's USDT funds if the user claims to have sent them to the incorrect address.

It all stemmed from a $1 million USDT transaction that had apparently gone awry. Last Monday, a user of Swerve Finance — an unaudited fork of decentralized finance (DeFi) protocol Curve Finance that launched September 4 — claimed in the platform's Discord channel that they had sent $1 million in USDT to the Swerve token contract and had lost it all.

How exactly the mishap occurred is unclear. But when Twitter user @Crypto_Plato posted a screenshot of the Discord messages, Tether CTO Paolo Ardoino responded: "If it's USDt ERC20 stuck in an address we should be able to recover it, but in order to be sure, please contact our customer support and we'll try our best."

The Swerve user, whose Discord handle is "Free," apparently took Ardoino up on his offer. That's according to the moderator of Swerve's Discord channel, whose handle is Mr. Fahrenheit (who declined to reveal their real name to The Block). Fahrenheit said they received the following message from a Tether executive:

"Hello Mr. Fahrenheit. I'm contacting you on behalf of Tether.to. We've recently been contacted by a user who transferred 1Mil USDt directly to the Swerve contract (0xb8baa0e4287890a5f79863ab62b7f175cecbd433). Before we take any recovery action I wanted to confirm with you if 1. the funds are unrecoverable under any normal usage and 2. part of our recovery process involves freezing/blacklisting the address the tokens are being recovered from. I wanted to ensure that would not cause any issues with Swerve's operation."

To freeze or not to freeze

What is Tether's "recovery" process? We already knew that the company, whose stablecoin accounts for more than 85% of the global market, blacklists addresses at the direction of law enforcement. But it also intervenes at its own discretion — apparently with fairly powerful tools.

"Sometimes users may mistakenly send transactions to incorrect addresses resulting in those tokens being inaccessible. If and when a user reaches out to Tether, we may start an investigation. We may be able to assist in recovering tokens if and as warranted," Ardoino told The Block. He explained: "Our investigation will put the original sending address through blockchain analysis tools and the user will need to prove ownership of the sending address."

Tether cannot move funds from one address to another, said Ardoino. But he said that Tether's Ethereum and Tron smart contracts have a code that allows the issuer to freeze stuck tokens, destroy frozen tokens, issue new tokens and send new tokens to affected users — for instance, in response to a request like Free's. (It cannot do this on any of the other six blockchains it supports: Algorand, EOS, Liquid Network, Omni, OMG Network, and Solana). 

Tether receives and resolves such requests often. In fact, Ardoino said it had helped 12 different users recover their funds in just a single day last week. He added that the company has helped recover approximately 5 million USDT this year so far and that the minimum that it will recover is 250 USDT.

Ardoino said that the ability to freeze funds is separate from Tether's process for blacklisting addresses in response to law enforcement requests. "Such assistance is at Tether's discretion and we make no guarantees of success, but we will always play by the rules, obey the law, and try to be supportive of the wider Tether community," said Ardoino.

Ardoino declined to answer the question of whether Tether helped Free get the $1 million back. Meanwhile, Mr. Fahrenheit told The Block that they told the Tether executive to go ahead with the "recovery." The blacklisting of the address won't impact Swerve's operations, they said.

"It's just a technical blacklist. Our token contract can never transfer tokens away from itself, so it being blacklisted doesn't matter," Mr. Fahrenheit said.

How unique is Tether's recovery mechanism? Josh Hawkins, SVP of global corporate communications at Circle, said the Centre Consortium — a joint initiative between Circle and Coinbase that issues the second most popular stablecoin, said that USDC — "doesn't have a clawback provision that would enable the kind of reversibility that you can apparently find with Tether."

Neither does Gemini, which issues the twelfth-most popular stablecoin, GUSD, The Block has learned. Paxos, which issues the fifth, sixth, and seventh-most popular stablecoins (Binance USD, Paxos Standard, Huobi USD, respectively), did not respond to The Block's queries by press time.

The headline of this report has been updated for clarity.