Treasury Urges Congress to Give Crypto Platforms Power to Freeze Suspicious Funds

The U.S. Treasury Department is urging Congress to consider creating a digital asset-specific “hold law” that would allow crypto platforms to temporarily freeze funds tied to suspected illegal activities.

The recommendation has appeared in a treasure chest report to Congress on technologies used to combat illegal digital asset financing produced under the Guiding and Establishing National Innovation for US Stablecoins, or GENIUS Act.

“Legal users of digital assets can leverage mixers to enable financial privacy when transacting on public blockchains,” the report reads, adding that a custody law measure would create a legal safe harbor allowing financial institutions to “temporarily and voluntarily retain digital assets involved in suspected illegal activities” during an investigation.

The authority could allow institutions to pause suspicious transfers before moving or converting funds through other crypto services.

“Exchanges often detect suspicious funds using blockchain intelligence, but there is not always a clear legal framework that allows them to hold these assets long enough for investigators to take action,” said Ari Redbord, global head of policy and government affairs at TRM Labs. Declutter.

This move could help “create a defined window for platforms to pause those funds while law enforcement goes through the legal process,” Redbord added.

If passed, it could “strengthen the way exchanges handle suspicious transactions,” Redbord explained, adding that in practice it would give law enforcement “time to catch up to the speed of blockchain transactions” and “strengthen public-private partnerships.”

The recommendation comes as Congress debates broader legislation with President Donald Trump on the structure of the crypto market put pressure on lawmakers to move faster on crypto regulations amid a clash between banks and digital asset companies.

Although exchanges can report suspicious activity, it is legally more difficult to hold onto the money, said Andrew Rossow, public affairs attorney and CEO of AR Media Consulting. Declutter.

“Banks already have the ability to delay a suspicious transaction, but that power is very limited and legally difficult,” he said.

Institutions can file a suspicious activity report, but there is no “clean legal safe harbor that allows the bank to hold the money while the investigation unfolds” without a court order, sanctioning authority or risking liability.

“For crypto exchanges, this problem is even trickier because there is no ‘pending state’ or ‘freeze’ that is ‘clean,’” he added, noting that while the Bank Secrecy Act protects institutions that submit good faith reports of suspicious activity, but does not clearly authorize them to freeze funds associated with those reports.

Exchanges that detect suspicious crypto flows would then have to choose between allowing the funds to move or freezing them, risking legal exposure.

If a hold law is passed, crypto platforms will have clear authority to pause assets while authorities review the case, Rossow explained.

But the Treasury Department report left “a number of vulnerabilities unaddressed,” Rossow noted, pointing to questions surrounding the reliability of blockchain analytics and the “tipping-off” limitations associated with current rules for reporting suspicious activity.

The proposal could create a paradox where transparency rules require disclosing a freeze, while suspicious activity reporting (SAR) rules prohibit explaining the underlying investigation, he warned.

“If you freeze someone’s assets and then have to be transparent about it, but you can’t tell them that you have filed a SAR, you now have a structural paradox. The customer will know he or she is frozen, but they won’t know why. This creates a legal gray area that needs to be exploited.”

Still, the recommendation could help create a “practical and important tool in the fight against crypto fraud and money laundering,” TRM Labs’ Redbord said.

“Criminals move fast, and digital assets move even faster,” he said. “A tailor-made custody authority helps close that gap.”