Conduit Sues Tether Over $2.76M USDT Freeze

A federal lawsuit filed in the Southern District of New York is putting Tether's unilateral freeze authority under judicial scrutiny for the first time in a significant commercial dispute. Cross-border payments firm Conduit alleges that Tether froze $2.76 million in USDT from its treasury wallet more than a year ago, has refused to release the funds, and has provided no legal justification for the action. The case carries direct implications for any accounting firm, CFO, or finance team that treats stablecoins as a liquid operating asset, and for the crypto compliance and reporting frameworks those teams rely on.

What the Lawsuit Says

Conduit filed its complaint on Monday, 6 October 2026. The company operates a cross-border payment network spanning more than 100 countries, using stablecoins including USDT to move client funds efficiently across borders. According to the filing, the frozen wallet functioned as Conduit's primary operating account, effectively the treasury equivalent of a business current account.

The Brazilian Police Connection

The freeze appears to have originated from an inquiry involving Onix Intermediações, a former Conduit customer. Tether reportedly acted on information connected to a Brazilian Federal Police investigation. The problem, as Conduit tells it, is that Brazilian law enforcement has confirmed it never directed Tether to freeze Conduit's specific treasury wallet, and a Brazilian court has confirmed that Conduit itself is not under investigation in the Onix matter.

Conduit also states that Onix had stopped using its platform entirely by April 2025, approximately one month before the treasury wallet at issue was even created. The filing argues that the frozen wallet therefore never held any funds that could be traced to Onix, making the freeze both legally unjustified and operationally damaging.

The Financial Stakes

Conduit is seeking the return of the $2.76 million in frozen USDT. It is also claiming an additional $2.76 million in damages, representing business losses caused by the operational disruption. The complaint adds a further dimension: it argues that Tether has continued to earn interest on the reserves backing the blocked tokens throughout the freeze period, and seeks to recover a share of those profits. In total, the lawsuit could require Tether to pay out well over $5.5 million if Conduit prevails.

The filing states plainly that "Conduit owes no money to Tether and has no obligation to Tether," framing the freeze as an act taken without any contractual or legal basis.

Why Tether Can Freeze USDT at All

Smart Contract Freeze Functionality

Tether's USDT contract includes a built-in freeze function that allows the issuer to immobilize tokens held at any specific address. This is not a secret feature: Tether has historically exercised it in response to requests from law enforcement agencies and, in some cases, proactively when it identifies addresses linked to illicit activity. The function is documented in the token's code and in Tether's terms of service.

What this case challenges is whether Tether exercised that power correctly. Conduit's position is that Tether acted on incomplete or misapplied intelligence, froze the wrong wallet, and then failed to review or reverse the decision even after law enforcement clarified its position.

No Formal Due Process Requirement

Unlike a bank account freeze ordered by a court or a regulator, Tether's freeze mechanism does not require judicial approval before it is applied. A bank receiving a law enforcement letter would typically have legal obligations around notification, timelines, and challenge procedures. Stablecoin issuers operating outside a banking charter currently occupy a different regulatory space, and there is no codified federal framework in the United States that governs the procedural rights of a wallet holder whose funds are frozen by an issuer acting on third-party intelligence.

That gap is exactly what this lawsuit may begin to test. Whether the Southern District of New York agrees with Conduit's framing will depend on the contractual terms governing USDT use and whether the court finds that Tether owed Conduit any duty of care or notice before acting.

Accounting and Reporting Implications for Finance Teams

For CFOs and accounting teams that hold USDT or other stablecoins as working capital, the Conduit case is a live illustration of a risk that has often been treated as theoretical. Good stablecoin custody and accounting implications for firms frameworks now need to account for issuer freeze risk explicitly.

Asset Classification and Impairment

Under both US GAAP and IFRS, the classification of a digital asset depends in part on whether the holder has unencumbered access to it. A stablecoin sitting in a treasury wallet that has been frozen is no longer freely accessible. That raises at minimum a disclosure question, and potentially a reclassification or impairment question depending on the duration of the freeze and management's assessment of recoverability.

FASB's ASC 350-60, which took effect for fiscal years beginning after 15 December 2024, requires entities to measure certain crypto assets at fair value through profit and loss. A frozen stablecoin pegged to the US dollar may still carry a book value of $1 per token, but if the entity cannot access those tokens and does not know when or whether it will recover them, the substance of that asset has changed materially. Auditors will rightly ask whether the carrying value is supportable and whether a contingent loss should be recognised or at least disclosed.

Contingent Liabilities and Legal Provisions

From a financial reporting standpoint, a company in Conduit's position faces two separate accounting questions. First, how to carry the frozen asset. Second, how to account for the ongoing legal proceedings. Under ASC 450 (US GAAP) or IAS 37 (IFRS), a company bringing litigation must consider whether any related contingent liabilities exist, and must disclose material legal proceedings. The company on the other side of such a claim, were it a reporting entity, would face a parallel obligation to assess whether a provision is required.

Operational Risk Disclosures

Any business that uses stablecoins as a core treasury or payment rail should now review whether its risk disclosures adequately describe issuer freeze risk. This is not hypothetical language: the Conduit case demonstrates that a freeze can be triggered by an inquiry into a third party, applied to the wrong wallet, and sustained for over a year without a clear resolution mechanism. A risk factor section that does not address this is arguably incomplete.

AML and Compliance Considerations

Third-Party Customer Risk Travels Upstream

The Conduit case also highlights a structural AML challenge for any platform that processes stablecoin flows on behalf of clients. If a downstream customer becomes the subject of a law enforcement inquiry, that inquiry can result in action against the platform's own treasury, even if the platform itself is not implicated and even if the specific wallet at issue has no connection to the suspect customer.

This is a known risk in correspondent banking, where a bank can find its accounts at a larger institution restricted because of concerns about one segment of its client base. The stablecoin context adds a layer of opacity: the freeze is applied on-chain by the issuer, often without the procedural scaffolding that surrounds a bank-level freeze. Firms should examine their customer due diligence and transaction monitoring programmes to understand what visibility they have into the regulatory risk profile of their client base and how that risk could affect their own treasury positions. Our coverage of Treasury sanctions and crypto AML obligations sets out the broader framework within which these risks sit.

What Firms Should Be Doing Now

The practical steps for accounting firms advising clients with stablecoin treasury exposure, and for in-house finance teams, are concrete and immediate. Review your stablecoin holdings and identify which wallets are held with issuers that include freeze functionality in their smart contracts. Understand the contractual terms governing those holdings, specifically what, if any, notice or recourse is provided if the issuer exercises a freeze. Assess whether your risk disclosures and board-level risk registers reflect issuer freeze risk as a category. And ensure that your crypto bookkeeping software or digital asset accounting software is capable of flagging a frozen balance separately from accessible liquidity, so that treasury reports do not inadvertently overstate available working capital.

If you are advising a client that has already experienced a freeze, the priority is to document the timeline and any communications with the issuer, assess impairment under the applicable accounting standard, and evaluate whether a legal provision is required under ASC 450 or IAS 37.

The Broader Market Signal

Tether is the largest stablecoin issuer by market capitalisation and by daily transaction volume. A court ruling that constrains how and when it can exercise its freeze function, or that imposes procedural requirements before a freeze can be sustained, would have wide implications across the stablecoin market. Conversely, a ruling that upholds Tether's current approach would confirm that issuers can act on third-party intelligence without notice, without a court order, and without a clear timeline for resolution.

Either outcome will matter to the growing number of businesses that rely on USDT as a payment rail or treasury asset. The case is also likely to inform how regulators think about the procedural rights of stablecoin holders as stablecoin legislation continues to develop in the United States and elsewhere. Finance teams and compliance officers would be well served to track its progress.

Source: The Block