Circle Freezes $12.6M in Zama Confidential USDC Contract, Blocking cUSDC Redemptions
Circle has blacklisted Zama's Confidential USDC (cUSDC) contract on Ethereum, freezing about $12.6 million and preventing cUSDC holders from redeeming into standard USDC.
The blacklist entry was added on May 30 and targets an ERC-1967 proxy contract that custody-holds USDC on behalf of cUSDC token holders. Circle's USDC smart contract includes a built-in blacklist controlled by authorized Circle accounts; once an address is blacklisted, it cannot send or receive USDC.
Zama's privacy-focused protocol uses fully homomorphic encryption (FHE) to obscure balances and transfer amounts on public blockchains. Circle has not publicly explained why it blacklisted the contract. In prior cases, freezes have been tied to sanctions, court orders, or suspected illicit activity, including Circle's 2022 blacklisting of USDC linked to Tornado Cash after U.S. Treasury sanctions.
Onchain investigator ZachXBT said the funds can be traced to a wallet that deposited 12.4 million USDC into Zama on May 11, and suggested the wallet appears connected to Overnight Finance. Overnight Finance recently conducted a Snapshot governance vote to distribute treasury funds after token holders alleged the team was preparing a rug pull; the dispute may have contributed to the freeze.
The incident is drawing attention because funds in the contract were commingled with other Zama users' deposits, raising the risk that unaffected cUSDC holders are locked out alongside any targeted address.
The move revives a long-running debate over the reliance of privacy protocols on fiat-backed stablecoins. While USDC operates on decentralized infrastructure, Circle retains unilateral control to freeze funds. Scrutiny has increased this year after Circle floated the idea of "reversible USDC" that could allow transaction rollbacks under certain conditions. Similar centralization concerns have been raised about Coinbase's ability to blacklist staked Ethereum through its smart contracts.
With the blacklist still in effect, cUSDC holders have no clear way to recover funds. Neither Zama nor Circle has issued a public statement addressing affected users. Market participants are watching whether Circle reverses the action or provides a rationale, a decision likely to influence how privacy projects weigh building on centrally issued stablecoins.
