Circle freezes Zama's cUSDC contract, trapping $12.6 million in user funds

Circle has blacklisted the smart-contract address used by Zama's confidential USDC product, effectively freezing about $12.6 million in stablecoins held in a privacy protocol that is not itself accused in any lawsuit. The action targeted Zama's cUSDC wrapper, an ERC1967 proxy that aggregates USDC for users who rely on Zama's fully homomorphic encryption to obscure balances on Ethereum. On-chain investigator ZachXBT said the blocked balance totals 12,606,386.10 USDC and that the blacklist took effect at 01:08 UTC on May 30. Circle has not provided a public explanation. The incident highlights a recurring DeFi risk: a centralized stablecoin blacklist can propagate through composable contracts, freezing pooled funds and affecting users who are unrelated to the underlying dispute. By dollar value, this is the largest example of that dynamic to date. Zama, which raised a Series B last year for its confidential blockchain stack, is the first named DeFi protocol to be hit at this scale. What triggered the freeze The catalyst was a civil dispute involving Overnight Finance, a DeFi protocol associated with the OVN token. Token holders have alleged the team was preparing to drain the treasury; they recently voted via Snapshot on distributing funds. Plaintiffs are seeking damages from Overnight Finance founder Maxim Ermilov. ZachXBT identified Delaware-based Patagon Management—a firm known for litigation against DAO projects—as one of the plaintiffs. A court issued a restraining order on wallets tied to the dispute the night before Circle acted. The wallet allegedly linked to the contested funds had deposited roughly $12.4 million USDC into Zama's cUSDC wrapper on May 11, representing more than 99% of the wrapper's balance. The order requested that Circle freeze the wrapper contract itself rather than the depositing address, and Circle complied. Because the wrapper pools assets, the blacklist blocks all USDC in the contract, not only the disputed portion. Zama's response Zama CEO Rand Hindi confirmed at 10:37 UTC that the company was investigating. "We are investigating the cUSDC contract freeze. I will update here as the situation progresses," he wrote. Hindi said the freeze is not related to Zama's privacy technology. He added that at the time of the May 11 deposit, the depositing address was not flagged or sanctioned by KnowYourTransaction monitoring tools. Zama has paused its cUSDC, cUSDT and cWETH contracts as a precaution while it reviews the situation. ZachXBT, who has described Zama as an innocent third party, alleged that the plaintiff mischaracterized the relationship between the frozen address and the Zama wrapper during court proceedings. He also said Zama appeared to have received no advance notice before Circle implemented the blacklist. A composability clash with centralized controls Circle's blacklist capability is embedded in the USDC ERC-20 contract. Authorized accounts can mark an address, after which that address cannot send or receive USDC and its existing balance becomes unusable. The mechanism is straightforward for externally owned wallets, but it becomes blunt when applied to pooled smart contracts where assets from many users are commingled. The structure mirrors a prior episode: in August 2022, Circle blacklisted Tornado Cash-sanctioned addresses after the U.S. Treasury added the mixer to the SDN list, freezing roughly 75,000 USDC. The Zama case applies the same control at a much larger dollar amount, and it is not tied to an OFAC designation. A court order stemming from private civil litigation was enough. Where users stand Circle CEO Jeremy Allaire said in April that Circle would not freeze USDC without a court order, even in cases involving stolen funds. This freeze meets that threshold but underscores a different consequence: a private plaintiff's court order has immobilized an entire DeFi privacy contract and, by extension, its users' funds. cUSDC holders currently have no clear route to recovery while the blacklist remains in place. Hindi said Zama will publish a postmortem and update compliance procedures after its review. Circle could reverse the freeze, narrow its scope, or explain its rationale; until then, the contract—and the users’ funds inside it—remain locked.