Key Points
- Circle executed a court-mandated freeze on $12.6M USDC stored within Zama’s privacy-focused smart contract
- The action originated from a lawsuit claiming Overnight Finance’s Maxim Ermilov misappropriated over $15M from company treasury accounts
- Zama describes being unexpectedly caught in legal proceedings without prior notification
- The smart contract architecture resulted in all pooled funds being locked, affecting innocent third-party users
- Blockchain investigator ZachXBT highlighted this as a potential landmark case for freezing protocol contracts containing mixed user deposits
Circle implemented a freeze affecting $12.6 million worth of USDC in the early morning hours of Saturday following judicial instructions to blacklist a smart contract operated by Zama, a privacy-focused protocol.
The restriction 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-preserving technology for blockchain ecosystems.
Rand Hindi, serving as Zama’s CEO, stated his organization received zero advance notification regarding the freeze. He characterized the contract as being “caught in a crossfire of another case.”
Background on the Overnight Finance Legal Battle
The legal proceedings revolve around Overnight Finance, a decentralized finance yield-generating platform responsible for creating the USD+ stablecoin along with the OVN governance token. On May 28, three investment funds holding OVN tokens initiated class action litigation 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 collective treasury wallets immediately preceding a governance vote that achieved majority approval on May 11. Approximately $12.5 million of the transferred amount consisted of USDC, with the majority channeled into Zama’s confidential contract system.
Ermilov contests these claims. He maintains that OVN token holders possessed no legitimate authority to demand treasury distribution and characterized certain voting participants as “raiders.” According to Ermilov, the wallets in question contained personal and team assets rather than treasury holdings.
He further explained the transfer to Zama’s platform was designed to “hide balances from the general public to minimize personal security risks,” referencing recent incidents involving kidnappings of 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 implemented the freeze later that same evening.
Unintended Consequences for Zama Platform Users
Due to the architectural design of Zama’s confidential USDC functioning as a wrapper contract, the blacklisting action froze the complete pool instead of isolating a single deposit. Consequently, additional Zama users with no connection to the legal dispute found their assets frozen as well.
Hindi observed that more than 99% of the contract’s funds originated from the single disputed deposit, as minimal activity occurred in the contract previously. In response, Zama has temporarily suspended operations for its cUSDC, cUSDT, and cWETH contracts pending investigation.
“This is an example of collateral damage affecting a public smart contract due to the centralised architecture of the underlying asset,” Zama communicated in an official statement.
Zama’s legal representatives confirmed efforts are underway to segregate the flagged address and reinstate access for users not implicated in the dispute.
The plaintiffs informed the court of their readiness to provide compensation to make uninvolved parties whole.
Growing Questions About Circle’s Freezing Practices
This freeze contributes to mounting criticism surrounding Circle’s blacklisting methodology. In March, ZachXBT alleged Circle improperly froze 16 wallets associated with legitimate commercial operations in relation to another sealed civil matter.
ZachXBT additionally reported that Circle neglected to freeze approximately $420 million across 15 fraud and hacking incidents since 2022. This total encompasses $232 million in misappropriated funds from the April 2026 Drift Protocol breach, despite Circle having a six-hour opportunity to intervene.
A judicial hearing addressing the emergency restraining order is set for June 1, 2026.
Get 3 Free Stock Ebooks
Discover top-performing stocks in AI, Crypto, and Technology with expert analysis.
- Top 10 AI Stocks - Leading AI companies
- Top 10 Crypto Stocks - Blockchain leaders
- Top 10 Tech Stocks - Tech giants
