When Circle or Tether freezes a wallet address, they call a blacklist or freeze function on their token's smart contract, which adds the targeted address to a list of restricted accounts. Once blacklisted, any attempted transfer of USDC or USDT from that address fails at the smart contract level before it even reaches the blockchain's validation layer. The freeze does not move the funds or destroy them. It simply makes them unmovable by anyone, including the wallet holder. The issuer retains the ability to reverse the freeze or, in some cases, to execute a forced transfer to a recovery address. Tether has used this capability to freeze hundreds of millions of dollars in USDT linked to hacks, scams, and sanctioned entities since the mechanism was first deployed.