Key Takeaways
- Circle received a federal court mandate to blacklist $12.6M in USDC stored within Zama’s confidential smart contract
- The action originates from class action litigation claiming Overnight Finance’s founder Maxim Ermilov moved over $15M from treasury accounts
- Zama claims it became collateral damage and received zero advance notice of the impending freeze
- The entire contract pool was locked down, ensnaring assets belonging to unconnected Zama participants
- Blockchain investigator ZachXBT described the move as establishing a troubling precedent for freezing protocol contracts containing mixed user funds
In the early hours of Saturday morning, Circle executed a freeze on $12.6 million worth of USDC following a federal court directive to blacklist a smart contract operated by privacy-focused firm Zama.
The action took effect at precisely 1:08 a.m. UTC on May 31, immobilizing 12,606,386 USDC tokens within the contract infrastructure. Zama operates as an open-source cryptography company specializing in privacy-enhancing technologies for blockchain ecosystems.
According to Zama’s CEO Rand Hindi, his organization received absolutely no advance notification before the freeze was implemented. Hindi stated the contract became trapped in the “crossfire of another case.”
Background on the Overnight Finance Legal Battle
The legal dispute revolves around Overnight Finance, a decentralized finance yield optimization platform responsible for creating the USD+ stablecoin and OVN governance token. On May 28, three investment funds holding OVN tokens initiated class action proceedings 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 communal treasury wallets immediately before a governance proposal achieved majority approval on May 11. Approximately $12.5 million of these funds consisted of USDC, with the majority being deposited into Zama’s confidential contract infrastructure.
Ermilov has rejected these accusations. He maintains that OVN token holders possessed no legitimate authority to demand treasury asset distribution and characterized certain participants in the governance vote as “raiders.” According to Ermilov, the wallets in question contained personal and team assets rather than treasury holdings.
Ermilov further explained that transferring assets into Zama’s privacy system was designed to “hide balances from the general public to minimize personal security risks,” referencing recent incidents involving kidnappings targeting cryptocurrency holders.
On May 29, U.S. District Judge P. Casey Pitts issued a directive instructing Circle to freeze the USDC held in the specified wallet. Circle executed the freeze later that same evening.
Unintended Consequences for Innocent Zama Participants
Due to the architectural design of Zama’s confidential [[LINK_START_0]]USDC[[LINK_END_0]] wrapper contract, blacklisting the address resulted in locking the complete pool rather than isolating a single deposit. This technical reality meant that other Zama users with no connection to the legal dispute found their assets suddenly inaccessible.
Hindi observed that more than 99% of the contract’s total value originated from the disputed deposit, as the contract had experienced minimal usage prior to this transaction. In response, Zama has temporarily suspended its cUSDC, cUSDT, and cWETH contract operations pending a thorough investigation.
“This is an example of collateral damage affecting a public smart contract due to the centralised architecture of the underlying asset,” Zama explained in an official statement.
Zama’s legal counsel indicated they are actively working to segregate the flagged wallet address and reestablish access for users not involved in the dispute.
The plaintiffs informed the court of their willingness to provide funds to compensate any innocent parties affected by the freeze.
Growing Questions About Circle’s Blacklisting Practices
This incident contributes to mounting criticism surrounding Circle’s wallet blacklisting methodology. In March, blockchain investigator ZachXBT accused Circle of improperly freezing 16 wallets associated with legitimate commercial entities in relation to an unrelated sealed civil proceeding.
ZachXBT additionally claimed that Circle neglected to freeze approximately $420 million across 15 documented fraud and hacking incidents since 2022. This figure encompasses $232 million in assets stolen during the April 2026 Drift Protocol breach, despite Circle allegedly having a six-hour opportunity to intervene.
A court hearing regarding the emergency restraining order is scheduled to take place on June 1, 2026.
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