Senate Panel Report Alleges Tether Fuels Iran’s Shadow Banking System
A 28-page report released by the Democratic staff of the Senate Permanent Subcommittee on Investigations (PSI) has accused Tether and its flagship stablecoin, USDT, of becoming a core tool for Iran’s “shadow banking system.” The report claims this allows Tehran to circumvent sanctions, funding regional proxies, missile and drone programs, and human rights abuses. According to the report, 87% of the USDT transactions from 757 sanctioned, Iran-linked wallets flagged for terror financing originated from wallets primarily trading USDT. Tether, in its response, stated that it had frozen $550 million in Iran-related USDT over the past year.
USDT as a Sanctions Evasion Tool
The report, led by Senator Richard Blumenthal, analyzed on-chain transaction data from 846 sanctioned or Iran-related crypto wallets. It revealed how Tehran is utilizing USDT to bypass U.S. sanctions, channeling funds to regional proxies, drone and missile programs, and to finance human rights abuses. Blumenthal stated that the report exposes how Tether and its token have enabled the Iranian government to defy the sanctions regime.
The core data presented in the report is striking: 87% of USDT transactions from 757 wallets implicated in Iranian terror financing originated from wallets that primarily traded USDT. Investigators noted that Iran’s preference for USDT is unsurprising, given its widespread use on Iranian crypto exchanges and its significantly higher liquidity compared to alternative stablecoins. This suggests that as traditional banking channels are cut off by sanctions, Iran’s financial networks naturally gravitate towards on-chain stablecoins, with USDT emerging as the preferred choice due to its dominant market share and deep liquidity.
Allegations of Tether’s Passive Approach
The report’s central argument is not that “Iran used USDT,” but rather that “Tether did not actively address it.” The report directly accuses Tether of repeatedly failing to freeze and block suspicious wallets. Investigators wrote, “Beyond receiving formal notices of sanctions or seizures, Tether has failed to take action against wallets exhibiting strong indicators of illicit finance, even when their association with Iranian entities or terrorist organizations has been public.”
The key accusation in this report is not that “Tether assisted Iran,” but that Tether was “passive.” The report implies that Tether’s freezing mechanism is reactive, only acting upon formal requests from the U.S. government or other jurisdictions. However, for wallets with anomalous on-chain transaction patterns, financial dealings with known Iranian entities, and sufficient publicly available information for judgment, Tether has not proactively intervened. This, the report suggests, falls short of the Anti-Money Laundering (AML) obligations expected of traditional banking institutions.
Calls for Investigation and Regulatory Action
In a letter to Attorney General Todd Blanche and Treasury Secretary Scott Bessent, Blumenthal urged them to investigate potential sanctions and banking law violations by Tether. This letter signals that the PSI’s investigation will not end with the report and that more substantial regulatory actions may follow.
The report also shifts focus to Tether’s political connections in the U.S. Blumenthal specifically mentioned Commerce Secretary Howard Lutnick, who led Cantor Fitzgerald, a firm that serves as Tether’s custodian, before entering government. Lutnick’s sons now manage the company’s operations. Separately, Bo Hines, former executive director of the White House crypto task force, is now the CEO of Tether U.S.
Blumenthal questioned whether the continued use of USDT by the Iranian regime, given Tether’s deep ties to the Trump administration, implies that Tether has received lenient enforcement and less oversight from federal authorities regarding its anti-money laundering obligations. The implication is clear: has Tether enjoyed a “regulatory exemption” due to its political relationships?
Tether’s Defense and the Stablecoin Dilemma
On Monday, Tether issued a statement emphasizing its role in freezing $550 million worth of Iran-related USDT over the past year. In a Tether press release, CEO Paolo Ardoino stated that USDT is not a haven for sanctioned individuals, terrorist organizations, or criminal networks. He stressed that public blockchains offer greater visibility into fund flows than cash, and Tether acts when provided with credible information by law enforcement.
Ardoino’s core argument is that Tether’s role is to “cooperate with law enforcement,” not to “conduct its own investigations.” While on-chain data is transparent, Tether’s position is that they freeze assets when law enforcement provides clear directives, and proactive screening is not their obligation.
The report places stablecoins in a paradoxical position: on one hand, USDT is a powerful tool for U.S. sanctions against Iran, with Tether’s freezing capabilities allowing it to track and lock illicit funds. On the other hand, USDT also serves as a conduit for Iran to circumvent sanctions, as anyone can use it to transfer funds as long as the wallet is not flagged.
Following the passage of the GENIUS Act, U.S. stablecoin issuers are required to hold substantial short-term U.S. Treasury debt, further integrating stablecoins with the U.S. financial system. This PSI report could become a focal point for future regulatory pressure, demanding that stablecoin issuers assume more proactive AML screening obligations, rather than merely “freezing upon notification.” For Taiwan, this also serves as a reminder to regulators: as stablecoins become mainstream tools for cross-border payments, ensuring local institutions are not entangled in international sanctions disputes will be a critical future challenge.
