Circle Freezes $12.6M in USDC Tied to Privacy Protocol Zama in Court-Ordered Action

TLDR

• A federal judge ordered Circle to freeze $12.6M in USDC held in Zama’s confidential USDC smart contract
• The freeze stems from a class action suit alleging Overnight Finance founder Maxim Ermilov diverted over $15M in treasury funds
• Zama says it was caught in “crossfire” and was given no warning before the freeze
• The freeze locked the entire contract pool, trapping funds from unrelated Zama users
• Onchain investigator ZachXBT called it “precedent-setting” to freeze a protocol contract with commingled funds

Circle froze $12.6 million in USDC early Saturday after a federal judge ordered the stablecoin issuer to blacklist Zama’s confidential USDC smart contract.

The freeze came at 1:08 a.m. UTC on May 31, locking 12,606,386 USDC in the contract. Zama is an open-source cryptography firm that builds privacy tools for blockchain applications.

The Overnight Finance Lawsuit

The case centers on Overnight Finance, a DeFi yield platform that issued the USD+ stablecoin and the OVN governance token. Three funds holding OVN tokens filed a class action suit on May 28 in the U.S. District Court for the Northern District of California.

The plaintiffs allege that Overnight Finance founder Maxim Ermilov moved more than $15.77 million out of shared treasury wallets just before a governance vote crossed majority on May 11. About $12.5 million of that was USDC, with the bulk moved into Zama’s confidential contract.

Ermilov disputes the allegations. He said OVN holders had no right to force a treasury distribution and described some of those involved in the vote as “raiders.” He said the wallets held personal and team funds, not treasury funds.

On May 29, U.S. District Judge P. Casey Pitts issued an order directing Circle to block the USDC in the wallet. Circle carried out the freeze that evening.

Collateral Damage for Zama Users

Because Zama’s confidential USDC is a wrapper contract, blacklisting it locked the entire pool rather than just one deposit. This means other Zama users unrelated to the dispute had their funds frozen too.

Hindi noted that over 99% of funds in the contract came from the single deposit in question, as there was little activity in the contract before it. Zama has since paused its cUSDC, cUSDT, and cWETH contracts while it investigates.

Zama’s legal team said it is working to isolate the flagged address and restore access for unaffected users.

The plaintiffs told the court they were prepared to advance funds to make unrelated parties whole.

Circle’s Freeze Record Under Scrutiny

The freeze adds to ongoing criticism of Circle’s approach to blacklisting. In March, ZachXBT accused Circle of wrongfully freezing 16 wallets linked to legitimate businesses in connection with a separate sealed civil case.

ZachXBT also said Circle failed to freeze roughly $420 million across 15 fraud and hack cases since 2022. That includes $232 million in stolen funds from the April 2026 Drift Protocol hack, despite having a six-hour window to act.

A court hearing on the emergency restraining order is scheduled for June 1, 2026.

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