Key Takeaways
- Circle received federal court instructions to blacklist $12.6 million USDC stored in Zama’s privacy-focused smart contract
- The action relates to a class action lawsuit claiming Overnight Finance’s Maxim Ermilov transferred over $15 million from treasury accounts
- Zama claims it became an unintended casualty and received zero advance notice of the impending freeze
- The contract-wide lockup affected innocent Zama protocol users whose funds were pooled in the same contract
- Blockchain investigator ZachXBT characterized the move as unprecedented, marking the first time a shared protocol contract faced such action
The stablecoin issuer Circle implemented a freeze on $12.6 million worth of USDC tokens during the early morning hours of Saturday following a federal court directive to blacklist Zama’s confidential USDC smart contract.
The enforcement action took effect at precisely 1:08 a.m. UTC on May 31, immobilizing 12,606,386 USDC tokens within the contract. Zama operates as an open-source cryptographic technology company specializing in privacy-enhancing solutions for blockchain ecosystems.
According to Zama’s CEO Rand Hindi, his organization received absolutely no advance notification prior to the freeze being executed. Hindi stated the contract became “caught in a crossfire of another case.”
Background on the Overnight Finance Legal Battle
The underlying litigation involves Overnight Finance, a decentralized finance yield optimization platform that created both the USD+ stablecoin and OVN governance token. On May 28, three investment funds holding OVN tokens initiated a class action lawsuit in the U.S. District Court for the Northern District of California.
According to the complaint, Overnight Finance’s founder Maxim Ermilov allegedly transferred more than $15.77 million from shared treasury wallets immediately preceding a governance vote that achieved majority approval on May 11. Approximately $12.5 million of these transferred assets consisted of USDC, with most of those funds being moved into Zama’s confidential contract system.
Ermilov has rejected these accusations. He maintains that OVN token holders lacked any legitimate claim to demand treasury asset distributions and characterized certain voting participants as “raiders.” According to Ermilov, the wallets in question contained personal and team resources, not treasury holdings.
Ermilov further explained that transferring assets to Zama’s privacy system was intended to “hide balances from the general public to minimize personal security risks,” referencing recent incidents of crypto holder kidnappings.
On May 29, U.S. District Judge P. Casey Pitts issued a directive instructing Circle to freeze the USDC in the specified wallet. Circle executed the freeze later that same day.
Unintended Consequences for Zama Protocol Users
Due to the architecture of Zama’s confidential USDC wrapper contract, the blacklisting action froze the complete pool instead of isolating a single deposit. This structural characteristic resulted in other Zama users with no connection to the legal dispute having their assets frozen as well.
Hindi observed that more than 99% of the contract’s total value originated from the single disputed deposit, as the contract had experienced minimal usage before that transaction. In response, Zama has temporarily suspended its cUSDC, cUSDT, and cWETH contracts pending a thorough review.
“This is an example of collateral damage affecting a public smart contract due to the centralised architecture of the underlying asset,” Zama declared in an official statement.
Zama’s legal counsel indicated they are actively working to segregate the problematic address and reinstate access for users not involved in the dispute.
The lawsuit plaintiffs informed the court of their readiness to provide compensation to make uninvolved parties financially whole.
Questions Raised About Circle’s Blacklisting Practices
This freeze contributes to mounting scrutiny regarding Circle’s blacklisting methodology. In March, ZachXBT alleged that Circle improperly froze 16 wallets associated with legitimate business operations in connection with an unrelated sealed civil proceeding.
ZachXBT additionally claimed Circle neglected to freeze approximately $420 million across 15 separate fraud and hacking incidents since 2022. This total includes $232 million in misappropriated assets from the April 2026 Drift Protocol security breach, despite having a six-hour opportunity to intervene.
A judicial hearing regarding the emergency restraining order has been set for June 1, 2026.
