Circle has frozen approximately $12.6 million in USDC following a court order, impacting the confidential USDC (cUSDC) contract utilized by the open-source cryptography firm Zama. The action occurred early Saturday morning, drawing a privacy protocol into a legal dispute it is not directly involved in.
The freeze was executed at 1:08 a.m. UTC, halting access to 12,606,386 USDC associated with Zama’s confidential USDC token on the Ethereum network, as indicated by public blockchain explorers.
Rand Hindi, CEO of Zama, stated on X (formerly Twitter) that the company is investigating the incident, noting that the contract appeared to be “caught in a crossfire of another case” and that Zama received no prior warning from Circle.
Key Takeaways
- Circle blacklisted Zama’s cUSDC contract on court order, freezing approximately $12.6 million in USDC.
- The freeze is linked to a class action lawsuit against Overnight Finance creator Maxim Ermilov for allegedly diverting treasury funds.
- Plaintiffs, including activist investors, seek to recover funds diverted from the Overnight Finance treasury.
- Zama’s confidential USDC contract was utilized to hold a significant portion of the allegedly diverted funds.
- The incident highlights concerns regarding the centralized control of assets like USDC and its impact on decentralized protocols.
The legal action stems from a class action suit filed on May 28 in the U.S. District Court for the Northern District of California. Three investment funds holding Overnight Finance’s OVN token have accused the protocol’s creator, Maxim Ermilov, of misallocating over $15 million from a shared treasury. The lawsuit identifies Ermilov as a Russian national residing in Abu Dhabi, who developed Overnight Finance, a decentralized finance yield platform that issued the USD+ stablecoin and the OVN governance token.
According to the complaint, Ermilov began selling OVN tokens in September 2023, promising holders a pro rata share of the treasury and voting rights over its disposition. The suit quotes a Discord message from November 2024 where Ermilov stated that acquiring 51% of OVN tokens would grant voting rights to distribute the treasury. A vote initiated by OVN holders on May 4, 2026, to liquidate the treasury for distribution to token holders was nearing completion when, on May 11, Ermilov allegedly transferred more than $15.77 million from the treasury wallets to a new address. Approximately $12.5 million of this amount was in USDC, with roughly $14 million bridged to Ethereum, and a substantial portion landing in Zama’s cUSDC contract.
The plaintiffs submitted an emergency application to the court requesting an asset freeze, a directive for Circle to blacklist the assets, and permission to serve Ermilov via email and Discord. U.S. District Judge P. Casey Pitts issued a text-only order on May 29 directing Circle to block the USDC in the specified wallet and scheduled a hearing for June 1 regarding the restraining order. Circle executed the freeze on the evening of May 29, Eastern Time, which corresponded to early Saturday morning UTC.
The nature of cUSDC, where a single contract holds the underlying USDC for all confidential token holders, means that blacklisting the contract freezes the entire pool, not just an individual’s deposit. The frozen $12.6 million USDC exceeds the disputed deposit amount, suggesting that funds belonging to other users were also caught in the freeze. In a declaration to the court, the plaintiffs indicated that the treasury assets constituted nearly all of the funds in the Zama Wallet and expressed readiness to compensate unrelated parties.
Rand Hindi clarified on X that due to the limited utility of the cUSDC wrapper at the time, the contract held very few funds, with “the vast majority (>99%) of funds in the cUSDC contract” originating from the hacker’s deposit. He also noted that the depositing address was not on any sanctions lists. Zama has announced it will pause its cUSDC, cUSDT, and cWETH contracts pending the completion of its investigation and necessary actions. Zama emphasized its role as an infrastructure provider, not a financial mixer, and stated its legal team is working with U.S. counsel to resolve the situation for innocent participants.
Onchain investigator ZachXBT commented that the freeze of a protocol contract with commingled user funds is a “precedent setting” event, expressing sympathy for Zama users indirectly affected by the U.S. civil case. The lawsuit characterizes the transfers to Zama’s contract as an attempt to conceal funds, leveraging the privacy features of the confidential contracts. However, Zama stated that its system does not obfuscate sender and recipient information, only balances and amounts, making it ineffective for hiding transaction trails.
Regulatory Precedent and Legal Stakes
This incident raises significant questions about the legal liability of centralized entities like Circle when complying with court orders that impact decentralized protocols and the assets of potentially uninvolved third parties. The legal stakes for companies involved are substantial, revolving around the balance between regulatory compliance and the unintended consequences for users of decentralized technologies.
The court’s decision to order Circle to blacklist a smart contract, effectively freezing funds belonging to multiple users to recover allegedly misappropriated assets, sets a potentially significant legal precedent. This action tests the boundaries of how traditional legal frameworks can intersect with the complexities of decentralized finance and privacy-preserving technologies.
The broader regulatory landscape, including frameworks like the European Union’s Markets in Crypto-Act (MiCA), aims to provide clarity and consumer protection. However, events like this highlight the challenges in applying existing or emerging regulations to novel technological constructs. The freeze underscores the ongoing debate regarding the extent to which stablecoin issuers and other intermediaries should be responsible for monitoring and controlling the flow of funds, even when acting under judicial compulsion.
For Zama, the immediate concern is the collateral damage to its users and the potential reputational impact. For the plaintiffs and the Overnight Finance protocol, the focus is on recovering the allegedly stolen funds and establishing legal accountability for Maxim Ermilov. The case also brings into sharp relief the contentious tactics employed by activist investors who utilize legal mechanisms to force the distribution of protocol treasuries, often by targeting the centralized points of control within the crypto ecosystem.
Circle’s position, as a regulated entity, is to act on court orders. However, the repeated instances of blacklisting raising concerns among the crypto community suggest a need for more nuanced approaches that can distinguish between illicit actors and legitimate protocol operations, particularly when user funds are commingled.
The plaintiffs’ strategy, particularly the involvement of firms like Patagon Management with a history of similar actions against DAOs and protocols such as Spartacus DAO and Aragon Association, indicates a recurring playbook. This involves leveraging court orders to freeze assets held by centralized entities or within identifiable smart contract addresses, even if it impacts unrelated parties. The previous denial of a similar request against Hector DAO by a New Jersey court indicates that such interventions are not guaranteed.
This case is likely to fuel further debate on the efficacy and fairness of centralized asset control in decentralized systems and the appropriate legal recourse when funds are moved across protocol boundaries.
Original article : www.theblock.co