Conduit Sues Tether Over $2.8M USDT Freeze
A New York lawsuit filed by crypto payments firm Conduit against Tether puts the industry's most widely used stablecoin under legal scrutiny for something that has long worried corporate treasurers: the unilateral, opaque freezing of customer funds. The suit alleges that Tether froze roughly $2.76 million in USDT belonging to Conduit in September 2025 and has refused to release it for over a year, citing criteria it has never disclosed. For accounting firms, auditors, and CFOs who rely on crypto accounting software to manage stablecoin positions, this case is more than a bilateral dispute. It is a live demonstration of the counterparty and liquidity risks embedded in every USDT treasury balance.
What Conduit Is Alleging
According to the complaint filed in New York, Tether froze Conduit's treasury wallet in September 2025 without providing any substantive explanation. When Conduit sought clarification, Tether reportedly directed the firm to a contact within Brazil's Federal Police, again without context. Conduit says that repeated requests to unfreeze the funds went unanswered in any meaningful way.
The Brazilian Federal Police Connection
Conduit eventually contacted the Brazilian Federal Police directly. The police response, as cited in the suit, is striking: officers reportedly confirmed that they did not identify Conduit's wallet for freezing and stated they were unaware of what evaluation criteria, if any, led Tether to act. The police did acknowledge that they had asked Tether to freeze wallets associated with a company called Onix Intermediações Ltda, which had links to another entity, Bull Intermediação de Negócios Ltda, that was under active police investigation.
Why Conduit Says the Freeze Was Unjustified
Conduit's argument hinges on a timing and wallet-separation point. The firm states that Onix did use Conduit's platform at some point, but that Onix's funds never touched the specific treasury wallet that Tether froze. Critically, Conduit says that treasury wallet did not even exist at the time Onix was operating through its platform. On that basis, Conduit argues that Tether acted entirely on its own initiative, applying undisclosed internal criteria rather than executing a lawful law enforcement request.
The Legal Claims and Remedies Sought
The lawsuit is broad in its causes of action. Conduit is pursuing claims of conversion, unjust enrichment, breach of fiduciary duty, and computer fraud, alongside a request for declaratory judgment in its favour. It also seeks a formal accounting of any interest, profits, or income Tether may have earned from the frozen funds since September 2025.
Damages Requested
On the relief side, Conduit wants the funds unfrozen, compensatory damages of no less than $2.76 million, punitive damages, and full restitution and disgorgement of any financial benefit Tether derived from holding the assets. The disgorgement claim is particularly significant: it implies that Conduit believes Tether may have deployed or otherwise benefited from the frozen USDT during the period of the freeze, which, if proven, would compound the reputational and legal exposure for the stablecoin issuer.
Operational Harm Claimed
Conduit is not framing this purely as a financial dispute. The complaint states that the freeze has directly impaired the firm's ability to pre-fund and settle client transactions, and that the operational disruption forced it to lay off employees and close offices. That detail matters for the damages calculation and for the broader industry conversation about what a stablecoin freeze actually does to a payments business that depends on real-time liquidity.
Accounting Implications for Firms and CFOs
A frozen stablecoin balance sits in a grey zone that digital asset accounting software must be configured to handle correctly. Under US GAAP, prior to the FASB's recent fair-value guidance on certain crypto assets, stablecoins held by businesses were typically classified as indefinite-lived intangible assets. Under the updated ASC 350-60 framework that now applies to many in-scope digital assets, fair value measurement is required. Either way, a freeze raises an immediate question: is this asset still recoverable?
Impairment and Contingent Liability Treatment
If there is genuine uncertainty about whether frozen funds will be returned, an auditor will ask management to assess whether the asset is impaired or whether a contingent liability should be recognised. ASC 450 governs loss contingencies: if a loss is probable and estimable, it must be accrued. A freeze lasting over a year with no resolution and active litigation is precisely the kind of situation that triggers that analysis. Firms carrying USDT on their balance sheet need to ensure their crypto bookkeeping software produces a clear audit trail from the moment any freeze event is detected, including the date, the amount, the wallet address, and all correspondence with the issuer.
Revenue Recognition and Client Settlement Obligations
For a payments firm like Conduit, the accounting is more complex still. If the frozen treasury wallet was used to pre-fund client settlements, the firm may have outstanding obligations to clients that it can no longer honour with those assets. That creates a potential liability on the other side of the balance sheet at exactly the moment the asset has become inaccessible. CFOs at payments firms or crypto-native businesses that use USDT for operational float should model this scenario explicitly and ensure their digital asset accounting software can flag a liquidity gap between frozen assets and outstanding settlement obligations.
AML and Compliance Considerations
The Conduit case raises a compliance question that goes beyond the two parties to the lawsuit. Tether's terms of service grant it the right to freeze wallets under certain conditions, including in response to law enforcement requests. But the complaint suggests that the freeze here may have gone further than what the police actually requested, targeting a wallet that had no apparent connection to the suspected activity. That creates a tension between two legitimate compliance goals: cooperating with law enforcement and avoiding the overreach that damages innocent third parties.
Know-Your-Customer Chain and Indirect Exposure
Accounting firms advising crypto businesses need to help clients understand that AML exposure can travel through the customer chain. Onix, the entity linked to the police investigation, was a customer of Conduit, not Conduit itself. Tether apparently traced that link and acted on it, even if, as Conduit alleges, the specific wallet had no actual connection to Onix's activity. This is the indirect exposure problem: a business can be operationally compliant and still find its assets frozen because a counterparty's counterparty attracted regulatory attention. Robust customer due diligence and transaction monitoring, documented in a way that survives external scrutiny, is the practical defence. Our earlier analysis of how Treasury sanctions on crypto fundraising networks affect firm-level AML obligations covers the broader framework that firms should be applying here.
Stablecoin Issuer Terms and Counterparty Risk
Every major stablecoin issuer reserves the right to freeze wallets. The Conduit lawsuit is a reminder that those contractual rights can be exercised in ways that a corporate treasury may not anticipate, and that the legal remedy, if one exists, is litigation in a jurisdiction the issuer chooses. For firms evaluating stablecoin counterparty risk, the question is not just whether the issuer is solvent, but whether the firm's legal position in a freeze scenario is defensible and how quickly it could access an alternative liquidity source. The ongoing regulatory debate around stablecoin custody and the OCC trust charter debate is directly relevant to how that risk framework may evolve.
What Firms Should Do Now
The Conduit case is still in its early stages. No court has ruled on the merits, and Tether has not yet filed its response. But the facts as alleged are specific enough to prompt immediate action at the firm level.
Practical Steps for Accounting Teams and CFOs
First, review every stablecoin issuer agreement your firm or your clients hold. Identify the freeze provisions, the notification requirements (if any), and the dispute resolution mechanism. Second, confirm that your crypto accounting software or digital asset accounting software generates an automatic alert and creates a timestamped audit entry the moment a wallet balance is flagged or frozen. Third, assess whether any frozen balance would trigger an impairment review or a contingent loss accrual under your applicable accounting framework. Fourth, model the liquidity impact of a freeze lasting 30, 90, and 365 days on any stablecoin position used for operational purposes. Fifth, brief your legal team now so that if a freeze occurs, the response timeline is measured in hours, not weeks.
None of these steps require waiting for the Conduit case to conclude. The risk it illustrates is already present in any treasury position that holds a freezable stablecoin.
Frequently Asked Questions
Can Tether legally freeze USDT without a court order?
Tether's published terms of service include provisions that allow it to freeze wallets under specified circumstances, including in cooperation with law enforcement. Whether those contractual terms are enforceable in a given jurisdiction, and whether the freeze was actually within their scope, is precisely what the Conduit lawsuit is asking a New York court to determine.
How should a frozen USDT balance be treated on a company's balance sheet?
Under US GAAP, a frozen stablecoin balance that is subject to genuine recovery uncertainty should be assessed for impairment. If a loss is both probable and estimable, ASC 450 requires accrual. Firms should document the freeze event, all communications with the issuer, and management's ongoing assessment of recoverability. Your crypto accounting software should maintain a complete audit trail from day one of the freeze.
What does the disgorgement claim in the lawsuit mean in practice?
Conduit's request for disgorgement of interest, income, and profit is an equitable remedy. It is based on the argument that if Tether held and potentially deployed the frozen USDT during the period of the freeze, it should not be allowed to keep any financial benefit derived from assets it allegedly had no right to retain. Courts have broad discretion in awarding or denying disgorgement, and the claim would require Conduit to demonstrate what, if anything, Tether earned from those specific funds.
Does this case affect businesses that hold USDT outside the US or Brazil?
The lawsuit is filed in New York and the freeze has a Brazilian law enforcement connection, but the underlying risk applies wherever USDT is held in a corporate treasury. Tether can freeze any wallet globally, regardless of where the wallet holder is incorporated or operating. The legal recourse available to a non-US entity would depend on its own jurisdiction and the terms it agreed to with Tether.
What is the difference between a freeze and a seizure in this context?
A freeze prevents the wallet holder from moving the assets; the funds remain nominally on the balance sheet but are inaccessible. A seizure would involve the assets being transferred to a law enforcement or third-party wallet. Conduit's complaint characterises Tether's action as both a freeze and an assumption of control over the funds, which is why it includes claims of conversion and unjust enrichment alongside the request for an accounting of any income Tether may have generated.
Source: Protos