Court Order Forces Circle to Freeze $12.6M USDC Linked to Zama Privacy Protocol

TLDR

• Circle executed a court-mandated freeze on $12.6M USDC stored within Zama’s privacy-focused smart contract
• The action originated from a class action lawsuit claiming Overnight Finance’s Maxim Ermilov misappropriated over $15M from treasury wallets
• Zama claims it was unexpectedly caught in the middle without prior notification of the freeze
• The entire contract pool was locked, preventing access to funds belonging to innocent Zama protocol users
• Blockchain investigator ZachXBT described the move as establishing a concerning precedent for freezing protocol contracts containing mixed user deposits

In the early hours of Saturday morning, Circle implemented a freeze on $12.6 million worth of USDC following a federal court directive to blacklist a smart contract operated by Zama, a privacy-focused protocol.

The action took effect at precisely 1:08 a.m. UTC on May 31, immobilizing 12,606,386 USDC tokens within the smart contract. Zama operates as an open-source cryptography company specializing in developing privacy-enhancing technologies for blockchain ecosystems.

Background on the Overnight Finance Legal Action

At the heart of this matter lies Overnight Finance, a decentralized finance yield protocol responsible for creating the USD+ stablecoin alongside the 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 legal filing, plaintiffs claim that Overnight Finance’s founder, Maxim Ermilov, transferred more than $15.77 million from shared treasury wallets shortly before a governance proposal achieved majority approval on May 11. Approximately $12.5 million of the transferred amount consisted of USDC, with most being deposited into Zama’s confidential smart contract infrastructure.

Ermilov has rejected these accusations. He maintains that OVN token holders possessed no legitimate authority to demand treasury fund distribution and characterized certain participants in the governance vote as “raiders.” According to his position, the wallets in question contained personal and team assets rather than communal treasury resources.

On May 29, U.S. District Judge P. Casey Pitts issued a directive instructing Circle to freeze the USDC holdings in the specified wallet. Circle implemented the freeze later that same day.

Unintended Consequences for Zama Protocol Users

Due to the nature of Zama’s confidential USDC as a wrapper-based contract, blacklisting the address resulted in locking the complete pool instead of isolating a single user’s deposit. Consequently, other Zama platform users with no connection to the legal dispute found their assets frozen as well.

Hindi pointed out that more than 99% of the contract’s total value originated from the disputed deposit, as the contract had minimal usage prior to this transaction. In response, Zama has temporarily suspended its cUSDC, cUSDT, and cWETH contracts pending a thorough investigation.

Zama’s legal representatives confirmed they are actively working to segregate the flagged wallet address and reinstate access for users who should not be affected.

The plaintiffs informed the court of their willingness to provide funds to compensate innocent parties impacted by the freeze.

Questions Raised About Circle’s Blacklisting Practices

This incident contributes to mounting scrutiny regarding Circle’s wallet blacklisting methodology. Earlier in March, ZachXBT alleged that Circle improperly froze 16 wallets associated with legitimate commercial operations in relation to an unrelated sealed civil proceeding.

ZachXBT additionally claimed that Circle neglected to freeze approximately $420 million across 15 separate fraud and hacking incidents since 2022. This figure encompasses $232 million in assets stolen during the April 2026 Drift Protocol security breach, despite Circle allegedly having a six-hour opportunity to intervene.

A judicial hearing regarding the emergency restraining order has been scheduled for June 1, 2026.

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