Circle proposes introducing a "transaction rollback" mechanism for USDC, sparking controversy over the "credit cardization" of stablecoins

Original Title: "Is Circle Making a 'Regret Pill'? Reversible Stablecoin Transactions Spark Heated Debate in the Crypto Community"

Original Author: jk, Odaily

Circle's Research on Reversible Transactions

Circle President Heath Tarbert recently told the Financial Times that the company is researching mechanisms that could roll back transactions in cases of fraud or hacking, while still maintaining settlement finality. He noted, "We're thinking... is it possible to have reversibility in transactions, but at the same time we still want to have settlement finality."

Simply put, if you are scammed or hacked, in theory you could get your money back.

This reversible transaction mechanism will not be implemented directly on the Arc blockchain that Circle is developing; instead, it will be achieved by adding a "reverse payment" layer on top, similar to how credit card refunds work. Arc is an enterprise-grade blockchain designed by Circle for financial institutions and is expected to launch fully by the end of 2025.

Tarbert also specifically mentioned that some benefits of traditional financial systems are currently missing in the crypto world, and some developers believe there should be "some degree of anti-fraud reversal function" if everyone agrees. In essence, Circle wants to make USDC more like a traditional financial product, so banks and large institutions can use it with confidence.

However, this proposal has sparked fierce debate within the crypto community. Critics worry that this could lead to centralization of the DeFi ecosystem: if Circle can arbitrarily reverse transactions, wouldn't it become the "central bank" of the crypto world?

Existing Intervention Mechanisms of Stablecoin Issuers

In fact, stablecoin issuers have always had the ability to freeze accounts. Tether and Circle, as the two major stablecoin issuers, have already established relatively mature freezing mechanisms to deal with hacking and illegal activities.

Tether's Proactive Intervention Model

According to documentation, Tether has built-in "blacklist" and "backdoor" mechanisms in the USDT smart contract, allowing it to freeze specific addresses, suspend USDT transfers from those addresses, and further execute burning and reissuing operations. This mechanism gives USDT the ability to "correct wallet-level errors" in extreme cases.

In September 2020, when KuCoin exchange was hacked, Tether urgently froze about $35 million in USDT to prevent further transfers. In August 2021, during the Poly Network cross-chain bridge hack, Tether immediately froze about 33 million USDT in the hacker's address. As of September 2024, Tether claims to have cooperated with 180 institutions worldwide to freeze at least 1,850 wallets suspected of illegal activities, helping to recover about $1.86 billion in assets.

Circle's Cautious Compliance Approach

In contrast, Circle takes a compliance route. The USDC contract also has a blacklist function to block token flows from specific addresses, but Circle usually only freezes addresses upon receiving valid law enforcement or court orders. Circle clearly states in its terms of service that once a USDC transfer is completed on-chain, the transaction is irreversible and Circle has no unilateral right to reverse it.

This difference is quite evident in practice. When users are scammed and send USDC to a scammer's address, unless law enforcement intervenes, Circle usually does not proactively freeze the scammer's address for individuals. This is in sharp contrast to Tether, which is willing to assist users in certain technically feasible scenarios.

In August 2022, after the US sanctioned the privacy tool Tornado Cash, Circle proactively froze about $75,000 worth of USDC on sanctioned Ethereum addresses to comply with the sanctions. In September 2023, at the request of Argentine authorities, Circle froze two Solana addresses belonging to the fraudulent "LIBRA" altcoin team, totaling about 57 million USDC.

These cases show that while Circle is usually conservative, it acts decisively when there are clear compliance requirements. Tether, on the other hand, is more proactive and willing to cooperate with users and law enforcement. The governance styles of the two companies are indeed quite different.

The Evolution of Ethereum Transaction Reversibility Proposals

As the largest smart contract platform, Ethereum has long debated transaction reversibility. From the DAO incident in 2016 to various recent proposals, this topic has always been a focal point for the community.

EIP-779: Historical Record of the DAO Hard Fork

EIP-779 does not propose a new feature, but records and explains the hard fork operation taken during the 2016 DAO hack. At that time, hackers exploited a DAO contract vulnerability to steal about 3.6 million ETH. After heated debate, the community chose a hard fork solution, making an "irregular state change" in blockchain history.

This hard fork did not technically roll back the block history, but modified the balances of specific accounts, deducting the stolen ETH from the "Child DAO" contract and transferring it to a refund contract, allowing original DAO investors to reclaim ETH proportionally. This was implemented in July 2016, directly restoring victims' funds, but also causing a community split. Some members who insisted on "code is law" refused to recognize this change and continued using the unforked chain, forming today's ETC.

EIP-156: ETH Recovery for Commonly Stuck Accounts

EIP-156, proposed by Vitalik Buterin in 2016, aimed to provide a mechanism for recovering certain types of lost ETH. The background was that early users, due to wallet software defects or operational errors, had ETH stuck in addresses controlled by no one. The proposal envisioned a proof mechanism: if a user could mathematically prove that certain ETH was lost by them and met specific conditions, they could initiate a withdrawal request to transfer the ETH to a new address.

However, EIP-156 remained at the proposal discussion stage and was never included in any Ethereum upgrade. After the Parity wallet incident in 2017-2018, some suggested extending EIP-156 to solve the Parity lock, but it was found that the proposal only applied to addresses without contract code and was powerless for cases like Parity, where the contract was self-destructed.

EIP-867: Controversy Over Standardized Recovery Processes

EIP-867, proposed in early 2018, is a "Meta EIP" called "Standardized Ethereum Recovery Proposals." It does not itself execute recovery operations but defines a template and process for future proposals requesting lost fund recovery. Its original intention was to provide guidelines for such proposals, specifying what information must be included and what objective criteria must be met.

EIP-867 sparked a community firestorm on Github. Then-EIP editor Yoichi Hirai refused to merge it as a draft, citing "incompatibility with Ethereum philosophy," and later resigned as editor out of concern that further progress might violate Japanese law. Opponents argued that "code is law" and frequent fund recoveries would destroy Ethereum's credibility as an immutable ledger. Many bluntly stated that if 867 were allowed, they would switch to Ethereum Classic.

Supporters emphasized flexibility, arguing that when fund ownership is very clear and recovery has little impact on others, recovery should be allowed on a case-by-case basis. Ultimately, EIP-867 became a litmus test for community will, with most choosing to defend the cornerstone of "immutability," and the proposal was shelved.

EIP-999: The Failed Attempt to Unfreeze Parity Multisig Wallets

EIP-999, submitted by the Parity team in April 2018, attempted to resolve the massive funds frozen by a major vulnerability in the Parity multisig wallet in November 2017. The vulnerability caused the Parity multisig library contract to be accidentally self-destructed, freezing about 513,774 ETH. EIP-999 proposed restoring the self-destructed library contract code at the Ethereum protocol level to unlock all affected wallets.

To gauge community opinion, Parity held a week-long coin vote on April 17, 2018. The results were close but slightly against: about 55% voted "do not implement," 39.4% supported EIP-999, and 5.6% were neutral. Without majority support, EIP-999 was not included in subsequent Ethereum upgrades.

Opponents argued that although it did not involve a full rollback, modifying contract code also violated immutability, and the move clearly favored Parity and its investors. A deeper reason was a matter of principle: some believed the Parity multisig library, as an autonomous contract, acted strictly according to code, and reversing its state would be artificial intervention in on-chain states that should not be changed.

ERC-20 R and ERC-721 R: Exploring Reversible Token Standards

ERC-20 R and ERC-721 R are new token standard concepts proposed by Stanford University blockchain researchers in September 2022, where "R" stands for Reversible. These standards attempt to extend the current most commonly used ERC-20 (token) and ERC-721 (NFT) standards by introducing mechanisms for freezing and revoking token transfers.

When a transfer based on ERC-20 R occurs, there will be a short dispute window. During this period, if the sender claims the transaction was mistaken or hacked, they can submit a request to freeze the assets involved in the transaction. A group of decentralized arbitration "judges" will review the evidence and decide whether to execute a rollback.

This proposal caused a stir on Crypto Twitter and among developers. Supporters argue that, given the $7.8 billion in crypto theft in 2020 and $14 billion in 2021, the fully irreversible transaction model has become a mainstream adoption barrier, and introducing reversibility could greatly reduce hacker losses.

However, opposition is also strong: many are concerned about the "decentralized judge" mechanism in the proposal, believing it runs counter to DeFi's trustless principles. Skeptics worry that human involvement will introduce censorship and regulatory intervention, and that governments could use this mechanism to revoke transactions, eroding blockchain's censorship resistance.

Those "Regret Pill" Events in Blockchain History

By reviewing major "rollback"-related events in blockchain history, we can better understand the application and impact of this mechanism in practice.

2016: The DAO Incident and Ethereum Fork

The DAO incident from June to July 2016 is considered the first case in blockchain history of artificially "reversing" the outcome of a hack. After hackers stole about 3.6 million ETH from the DAO contract, the Ethereum community voted in July to implement a hard fork, transferring the stolen ETH to a refund contract and restoring it to investors. This caused a community split, with opponents staying on the non-rolled-back chain, forming Ethereum Classic, and establishing a lasting wariness toward reversibility.

2017: The Double Blow to Parity Wallet

In July 2017, the Parity multisig wallet was hacked for the first time, with hackers stealing about 150,000 ETH via a vulnerability. After the bug was fixed, another incident occurred in November: a developer's operational error caused the Parity multisig library contract to self-destruct, freezing about 513,000 ETH. This incident directly led to recovery proposals like EIP-999, but none gained community support.

2018: EOS's Arbitration Experiment and Failure

In June 2018, within a week of EOS mainnet launch, its arbitration body ECAF twice froze a total of 34 accounts. The community was divided over such on-chain arbitration, and the arbitration system was eventually weakened. This experience showed that strong centralized governance triggers backlash, damaging EOS's reputation and proving the decentralized community's natural aversion to excessive human intervention.

2022: BNB Chain's Successful Loss Mitigation

In October 2022, hackers exploited a BSC cross-chain bridge vulnerability to mint about 2 million BNB (worth nearly $5.7 billion) out of thin air. Upon discovering the anomaly, the Binance team immediately coordinated with BNB Chain validators to urgently pause the blockchain, then released a hard fork upgrade within days to patch the vulnerability and freeze most of the BNB in the hacker's address. According to Binance, about $100 million was moved off-chain by the hacker, while the vast majority was "under control."

This event proved that on blockchains controlled by a small number of trusted entities, consensus can be quickly reached to execute rollbacks or freezes, even for huge sums. Conversely, this drew criticism from the decentralization camp, who argued that BNB Chain is more like a database that can be arbitrarily manipulated, lacking the censorship resistance expected of a public chain.

Successful Cases of Stablecoin Freezing

When chain-level rollbacks are impossible, stablecoin freezing mechanisms become important tools for asset recovery. After KuCoin was hacked in September 2020, multiple parties coordinated, Tether froze about 35 million USDT, and various projects upgraded contracts to freeze stolen tokens, recovering more than half the assets. In the massive Poly Network cross-chain bridge hack in August 2021, Tether quickly froze 33 million USDT. Although other on-chain assets could not be frozen, the hacker ultimately returned all funds, partly because stablecoin freezing made it hard to cash out.

Conclusion: Seeking Balance Between Immutability and User Protection

Circle's exploration of reversible transactions reflects a fundamental contradiction: how to provide necessary user protection mechanisms while maintaining the core value of blockchain immutability. From a technological development perspective, there is indeed tension between absolute irreversibility and the complex needs of the real world.

Current solutions show a layered approach: the underlying blockchain remains immutable, but the application, token, and governance layers offer various "soft reversibility" options. Stablecoin freezing mechanisms, delayed confirmation for multisig wallets, and arbitration interfaces for smart contracts all achieve some degree of risk control without modifying on-chain history.

If Circle's proposal is ultimately implemented, it will represent the stablecoin sector moving closer to traditional financial standards. But its success depends not only on technical implementation, but also on whether it can gain acceptance from the crypto community. History shows that any attempt to normalize transaction rollbacks faces strong resistance. It remains to be seen whether Circle can find a subtle balance between protecting users and maintaining decentralized trust.

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