USDT frozen wallet: Conduit's lawsuit says Tether locked $2.76 million in a wallet the police never flagged — what it means for merchants who hold stablecoins

What Conduit says happened to its USDT frozen wallet

Conduit is a Delaware company, founded in 2021, that moves money between stablecoins and local currencies across Latin America, Africa and Asia. Like many payments firms, it runs two kinds of wallets. Client wallets execute customer transactions. Treasury wallets hold the company's own money, which it uses to pre-fund those transactions. The wallet at the center of the suit is a treasury wallet on TRON, held in Conduit's Fireblocks institutional custody account. According to the 17-page complaint, only Conduit's treasury staff could sign for it.

Here is the timeline as the complaint tells it:

• June 2024: Brazil's Federal Police open an investigation into Bull Intermediação de Negócios (BULL), a financial intermediary that shares owners with another firm, Onix Intermediações. Onix was once a Conduit customer.
• April 22, 2025: Onix makes its last transaction on Conduit's platform.
• May 20, 2025: Conduit creates the treasury wallet, almost a month later. Over the next four months the wallet processes 4,427 transactions with 78 counterparties, more than $1.1 billion in volume. Conduit says none of them involved Onix or anyone linked to it, and that anyone can check this on-chain.
• September 16, 2025: a police analysis report lists wallets tied to BULL. It doesn't name Conduit or its wallet.
• September 24, 2025: Tether freezes Conduit's wallet along with wallets tied to the investigation. About $2.76 million in USDT stops moving.
• June 2026: Conduit contacts Tether at least four times. Tether replies that it is following up, or refers Conduit to the police.
• July 1, 2026: in a filing to a Brazilian court, the police describe their process. They identified suspect wallets, passed the list to Tether's T3 Financial Crime Unit in a virtual meeting, and T3 decided which wallets to freeze using its own criteria. Conduit's wallet was not on the police list.
• August 19, 2026: Conduit's lawyers demand that Tether unfreeze the wallet within five business days. The complaint says Tether didn't respond.
• October 5, 2026: Conduit sues in the Southern District of New York and demands a jury trial.

The complaint has six counts: conversion, unjust enrichment, breach of fiduciary duty, a federal computer-fraud claim, a declaratory judgment and an accounting. Conduit wants the wallet unfrozen, at least $2.76 million in damages, punitive damages, and the interest Tether has earned on the reserves backing the frozen tokens. It says the freeze cut the volume it could pre-fund and forced it to lay off staff and close offices.

Two cautions. First, this is one side's account. The Brazilian documents are described in the complaint, not published with it, and no court has tested any of it. Second, we found no public response from Tether when we published on October 9, and it may have reasons that aren't in the record. Neither caution changes the lesson for merchants. Whoever turns out to be right, a business went more than a year without its working capital, and nothing it could do with its own keys changed that.

Why this isn't a typical sanctions freeze

Most stablecoin freezes follow a recognizable pattern. A government designates an address, or law enforcement sends the issuer a list, and the issuer blacklists it. By its own count, Tether has helped freeze more than $4.9 billion across more than 2,900 investigations. When we covered the Senate report on USDT and Iran on October 1, we wrote that in practice freezes target addresses that authorities have designated or flagged. We also wrote that pressure to freeze earlier would widen the net and catch more people at its edges.

Conduit's complaint describes one of those edges. The police list existed, but the wallet wasn't on it. As Conduit tells it, the freeze came from Tether's own unit extending that list. The complaint also states that no court order, warrant, subpoena or other legal process in the United States directed Tether to freeze the wallet.

It's also the second case like this in the same court in five weeks. On August 31, two Thai businessmen sued Tether over 42.4 million USDT frozen across ten Ethereum addresses on October 30, 2025. They say Tether acted on an informal request from a US Homeland Security agent, nearly four months before a seizure warrant was issued in a separate scam investigation. Tether called that suit "a baseless attempt to interfere with Tether's important work with global law enforcement," as reported by CoinDesk. Together, the two cases could lead a court to rule on how far an issuer's freeze power reaches over holders who never signed anything with it.

Three things merchants assume about stablecoin freezes, tested against this case

1. "Self-custody protects me from a freeze"

Self-custody protects you from a lot: a processor's compliance hold, an exchange's withdrawal pause, a custodian's bankruptcy. It doesn't protect you from the issuer. USDT and USDC are smart contracts with a blacklist function. Once the issuer adds an address to it, the token on that address can't move, wherever the keys are kept. Conduit's keys sat in Fireblocks, and every signer was a Conduit employee. The freeze happened anyway, because it happened at the contract, not in the wallet.

2. "If treasury is separate from receiving wallets, a bad payment can't reach my reserves"

Keeping them separate is good practice, and we recommended it on October 1. It limits flow-based risk: if a tainted payment lands in your operating wallet, your treasury never touches it. But Conduit says it already did exactly this. The frozen wallet held only Conduit's own money, never received client funds, and didn't exist while Onix was a customer. If the complaint is accurate, the trigger was a relationship, not a transaction. An issuer's analytics can tie wallets to a company. Once they do, separating wallets inside that company doesn't help.

3. "If an issuer freezes me by mistake, there's a process to fix it"

You can contact support, but nothing guarantees a deadline or a right of appeal. Tether's terms of service let it freeze tokens "as required by applicable Law or where Tether, in its sole discretion, determines it is prudent to do so." Only verified Tether customers can redeem tokens directly with Tether. A merchant paid in USDT by its customers usually has no account with Tether, and Conduit says no contract between it and Tether covers this dispute. Its route went from emails, to referrals back to the police, to a demand letter, to a federal lawsuit. The money was still frozen more than a year later.

Meanwhile, the dollars behind a frozen token keep earning. Tether invests its reserves mainly in US Treasury securities, and the complaint argues that a freeze "costs Defendants nothing and preserves for them the interest the reserves generate." In practice, a frozen balance is an interest-free loan to the issuer for as long as the freeze lasts.

Is USDC different?

The policy differs somewhat. The mechanics are the same. Circle's USDC terms reserve the right to block USDC addresses that Circle determines, "in its sole discretion, may be associated with illegal activity." They also say Circle may be required to freeze USDC when it "receives a legal order from a valid government authority." Circle is regulated in the US and has generally tied freezes to legal orders. Tether's terms give more weight to its own judgment. Those differences could matter in a dispute. They don't make either token freeze-proof.

So switching issuers isn't the answer. The answer is to make sure no single issuer's decision can reach all your working capital. An issuer can only freeze its own token. If a business keeps half its operating cash in USDC and half in USDT, one freeze can lock half of it, not all. Assets without an issuer, such as bitcoin or ether, can't be blacklisted at all, but their price moves, which is why most merchants who accept them convert to a stablecoin. That trade-off is a treasury decision for you and your advisers. For how the two big stablecoins compare in everyday payments, see USDT vs USDC for payments.

How to size your freeze exposure

Here's a practical way to think about it. Your exposure to any one issuer is the balance you hold in its token multiplied by how long you hold it. Conduit had $2.76 million in one token at one address. By the day it sued, that balance had been frozen for 376 days. Most merchants hold far less, but the same two levers apply: how much, and for how long.

A checklist that holds up however the case ends:

1. Set a holding limit per issuer. For example, no more than a set number of days of revenue in any single stablecoin. Pick the number with your accountant; what matters is having one.
2. Pay out from inflows instead of building balances. If you pay suppliers or contractors in stablecoins, paying them from the week's receipts keeps balances low.
3. Hold runway elsewhere. Ask how many weeks you could operate if your largest stablecoin balance were frozen tomorrow. For Conduit, the answer meant layoffs.
4. Know your customers, especially B2B payers. If issuers attribute wallets to companies, who you serve matters as much as what lands in your wallet. This matters most for payments businesses and marketplaces.
5. Keep evidence ready. Conduit's strongest evidence is its public transaction history. Pair the on-chain data with your own records: invoice, customer, amount, network and transaction hash.
6. Know who you'd call. Before you need them, find the issuer's support and compliance contacts and a lawyer who handles digital assets in your jurisdiction.

What changes for different businesses

• A cross-border payments or remittance business, which is Conduit's model. Prefunding is where the exposure sits. Split prefunding balances across issuers, and size them for the next settlement cycle, not the next quarter.
• A store in São Paulo, Buenos Aires or Mexico City paid in USDT. Keep accepting what customers pay with. Brazil's rules changed on October 1 (see our Brazil eFX analysis), and this case started in a Brazilian investigation. Decide each day what you keep, and in which token. A POS that shows a fresh QR code for each sale gives you a record of every sale from the start.
• An exporter or B2B seller invoicing in stablecoins. Tickets are large and counterparties are known. Invoices with expiry and overpayment detection tie each payment to one invoice and one customer, which is the evidence you'd need if a freeze were ever disputed.
• An online store using auto-conversion. Auto-convert to the stablecoin you've chosen, then move balances to treasury on a schedule, so a single day's receipts never turn into a quarter's working capital.
• An API seller paid by AI agents. With x402, agents pay in USDC on Base for each call. Payzum sits in front of your API as a proxy, and payments are settled by an external facilitator. Every payment arrives in one issuer's token by design, so keep balances moving.

Where Payzum fits, and where it doesn't

Payzum is a non-custodial, crypto-only payment processor. Payments settle directly to a wallet you control, and Payzum never holds, pools or controls the funds. Here's what that means for freeze exposure:

• No processor in the middle. There's no Payzum balance to freeze or hold. The path is customer → blockchain → your wallet.
• You choose the token you settle in. Accept USDT, USDC and other crypto on Bitcoin, Ethereum, Solana, Polygon, Base, Arbitrum, Optimism, BNB Chain and Avalanche, with optional auto-conversion to USDC or USDT.
• Funds arrive in seconds, so you can move them. Confirmation typically takes about 0.4 seconds on Solana and about 2 seconds on Base and Polygon. Nothing waits in a settlement queue before you can rebalance.
• Pay out from inflows. Mass payouts in EVM stablecoins on Polygon, Arbitrum, Optimism, Base, BNB Chain and Avalanche, plus CSV payouts in BTC, LTC and DOGE, help keep balances low.
• A record of every payment. Invoices with expiry and overpayment detection, signed webhooks, a REST API and a full audit log.

The limits, stated plainly: Payzum can't prevent an issuer freeze, can't unfreeze a token, and doesn't decide who is a legitimate counterparty. If Tether or Circle blacklists an address, it stays blacklisted in your wallet. What Payzum gives you is a payment flow with no custodian in the middle, control over which token you settle in, and a clean record of every payment.

How it works, step by step

1. Connect a wallet you control. Self-custody, hardware or multisig. Payzum settles into it and never holds the keys.
2. Set your settlement policy. Choose which networks and tokens you accept, and whether payments auto-convert to USDC or USDT.
3. Turn on the ways you charge. Online, use hosted checkout, payment links and buttons, drop-in plugins (WooCommerce, Magento 2, PrestaShop, Shopify and others), invoices or subscriptions. In store, use the POS, with a fresh QR code for each sale and PIN-protected cashiers.
4. Reconcile and rebalance. Signed webhooks push each payment into your systems. You move balances to treasury, across issuers or out as payouts, on your own schedule.

Fair objections

"We only know Conduit's side."

True, and we've said so. Tether may answer with facts that change the picture, and the court may side with it. But the lesson for merchants doesn't depend on the verdict. Issuers have the power to freeze, they use their own judgment, and getting funds back can take more than a year. Plan for that whoever wins.

"Should we stop accepting USDT?"

Usually not. In much of Latin America, Africa and Asia, USDT is what customers hold. Refusing it loses sales without removing issuer risk, because USDC can be frozen too. Accept what customers pay with, then decide what you hold and for how long.

"We're small. Would an issuer ever look at us?"

Probably not on its own initiative. The Conduit case suggests the risk comes from association with a customer or counterparty under investigation, more than from size. A small business with a few large B2B payers should know those payers well.