Court Order Forces Circle to Freeze $12.6 Million in Zama’s Confidential USDC Contract, Locking Unrelated Users’ Funds

A federal court order directed Circle to blacklist Zama’s, an open-source cryptography company, confidential USDC contract (cUSDC) on Friday night, freezing approximately $12.6 million in pooled user funds and effectively bricking Zama’s privacy-focused stablecoin wrapper on Ethereum. The freeze arose from a class-action suit filed against Overnight Finance creator Maxim Ermilov, but its scope swept through unrelated users due to how cUSDC’s pooled-wrapper architecture functions.

The plaintiffs allege Ermilov moved more than $15.77 million from a shared Overnight Finance treasury into Zama’s cUSDC contract just before a governance vote by OVN token holders crossed a majority threshold to liquidate the treasury and distribute the funds. The lawsuit cites a November 6, 2024, Discord message in which Ermilov wrote: “you can buy 51% of OVNs and vote to have [the Treasury] distributed.” The OVN holders’ vote, initiated May 4 and crossing the majority threshold around May 11, would have triggered a pro rata claim on treasury funds. Roughly $12.5 million of the disputed funds were USDC, with the bulk ending up in cUSDC.

This story is an excerpt from the Unchained Daily newsletter.

The plaintiffs are activist investors, including Patagon Management, a firm with a track record of forcing DAO payouts that secured a $35 million asset freeze in a similar 2023 case. On May 29, US District Judge P. Casey Pitts issued a text-only order directing Circle to block the USDC in the wallet and set a hearing on the temporary restraining order for Monday, June 1. Circle carried out the freeze that evening Eastern Time.

The structural issue is the wrapper architecture. cUSDC is a single smart contract that holds USDC backing every confidential token holder. Blacklisting the contract locks the entire pool, not just the disputed deposit. Zama has paused its cUSDC, cUSDT, and cWETH contracts while it investigates and works to segregate the flagged wallet from unaffected users.

Zama CEO Rand Hindi said the protocol was “caught in a crossfire” and that the team is investigating. He noted that more than 99% of the contract’s total value originated from the disputed deposit, indicating cUSDC had minimal organic usage at the time of the freeze, which limits the collateral damage to a small set of legitimate users. Hindi also said Zama was not notified in advance of the freeze, calling it a “classic restraining order as we see often in DeFi” that should have been communicated. Ermilov, meanwhile, told The Block that the OVN holders “had no right to vote the way they did,” characterizing the participants as “raiders” and claiming the funds in question were personal and team assets rather than communal treasury.

The case raises a question the stablecoin industry has not yet resolved: what happens when a court-ordered freeze targets a smart contract that pools funds from multiple unrelated users? Unlike a wallet freeze, which affects a single address holder, blacklisting a wrapper contract locks funds for every depositor who interacted with it. The episode also highlights the persistent tension between centralized stablecoin issuers like Circle, which retain unilateral freezing authority, and privacy-focused protocols that depend on USDC as collateral. Circle has long defended its compliance powers as necessary for regulated stablecoin operation, but the Zama freeze shows how the same mechanism can become a structural choke point for DeFi.