Circle Freezes $12.6 Million in Zama cUSDC Contract

Why Did Circle Freeze Zama’s Confidential USDC Contract?

Circle froze about $12.6 million in USDC after a federal judge ordered the company to blacklist the Ethereum contract behind Zama’s confidential USDC token, pulling a privacy-focused infrastructure protocol into a dispute over Overnight Finance treasury funds. The blacklist hit the cUSDC contract early Saturday, locking 12,606,386 USDC. Public block explorers label the frozen address as Zama’s confidential USDC token. Because cUSDC is a wrapper that holds the USDC backing every confidential token holder, the freeze affected the full pool rather than isolating one disputed deposit. The order followed a class action suit filed May 28 in the U.S. District Court for the Northern District of California. Three funds that hold Overnight Finance’s OVN token accuse protocol creator Maxim Ermilov of moving more than $15 million from wallets they describe as a shared treasury after token holders began voting to liquidate the assets and distribute proceeds. U.S. District Judge P. Casey Pitts issued a text-only order on May 29 directing Circle to block the USDC in the wallet and set a hearing on the emergency restraining order for June 1. Circle carried out the freeze that evening Eastern Time, early Saturday UTC.

What Is the Overnight Finance Dispute?

Overnight Finance was a DeFi yield platform that issued the USD+ stablecoin and the OVN governance token after an $850,000 pre-seed raise led by Hack VC in February 2022. The lawsuit says Ermilov sold OVN beginning in September 2023 while representing that holders had a pro rata claim on the treasury and the right to vote on its future. The complaint cites a November 2024 Discord message in which Ermilov allegedly wrote that holders could “buy 51% of OVNs and vote to have [the Treasury] distributed.” OVN holders later initiated a vote on May 4, 2026, to liquidate the treasury and pay themselves out. According to the lawsuit, just before the vote crossed a majority on May 11, Ermilov moved more than $15.77 million out of the disputed wallets and into a new address. About $12.5 million of that amount was USDC, with roughly $14 million in total bridged to Ethereum. Most of the funds then landed in Zama’s confidential USDC contract. Ermilov disputed the allegations, arguing that OVN holders had no right to force a treasury distribution. “They had no right to vote the way they did,” he said. “OVN is not a security, so no rights to profit or distributions of any nature.” He said the token provided governance rights over protocol operations and smart contracts, not a claim on profits or distributions. Ermilov also disputed the description of the wallets as treasury wallets, saying they were externally owned accounts that held mostly personal or team funds. He said the funds included proceeds from OVN token sales by the team, yield farming involving OVN and USD+ tokens, and protocol revenue. Asked why the funds were moved into Zama’s confidential USDC system, he said the aim was to “hide balances from general public to minimize personal security risks,” citing recent kidnappings of crypto holders.

Investor Takeaway

The case shows how governance disputes can quickly become infrastructure disputes. A legal fight over one DeFi treasury ended with a freeze on a shared smart contract, raising new questions for privacy protocols, stablecoin issuers, and token holders using pooled wrappers.

Why Is Zama Calling This Collateral Damage?

Zama CEO Rand Hindi said the company was looking into the freeze and later wrote that the cUSDC contract appeared to have been “caught in a crossfire of another case.” He also said Circle gave no warning before the freeze. The mechanics of the contract are central to the dispute. The 12.6 million USDC frozen is slightly more than the disputed deposit, which suggests other users’ funds were locked alongside it. Plaintiffs told the court that the treasury assets made up nearly all of the Zama wallet and said they were prepared to advance funds to make unrelated parties whole. “Since there wasn't much utility yet for the cUSDC wrapper, there were very little funds in it, and as a result the vast majority (>99%) of funds in the cUSDC contract came from that single hacker's deposit,” Hindi wrote, adding that the depositing address did not appear on sanctions lists. Zama said it will pause the cUSDC, cUSDT, and cWETH contracts until it completes its investigation, identifies addresses linked to the case, and takes action. The company also pushed back against the idea that its system is a mixing service. “This is an example of collateral damage affecting a public smart contract due to the centralised architecture of the underlying asset. Zama is an infrastructure provider, not a mixer or a tumbler,” Zama said. “Our legal team is already in communication with US counsel and relevant parties to isolate the flagged address and restore access for all innocent pool participants as quickly as possible.” The distinction matters because Zama’s system masks the amounts of later confidential transfers, but the initial USDC deposit remains visible on the public ledger. Hindi said it is “really useless for hackers to try to use Zama to hide their trail” because the protocol does not hide the sender and recipient, only balances and amounts.

Why Does This Matter for Stablecoin Freeze Powers?

The case adds to a wider debate over stablecoin issuers’ ability to freeze assets. Circle says it acts on court or law enforcement orders, but critics argue that freezes in private civil disputes can become too broad when they hit pooled contracts or unrelated wallets. Onchain investigator ZachXBT, who flagged the freeze, called it “precedent setting” to blacklist a protocol contract where funds are commingled with other users. “Overall I feel bad for Zama users who have now been indirectly impacted with this mess of a US civil case,” he wrote. The plaintiffs are not ordinary passive holders. One co-plaintiff, Patagon Management, has a record of pressuring DAOs and protocols to liquidate treasuries and return value to token holders. In a similar 2023 case involving Spartacus DAO, Patagon secured an order restraining access to $35 million in crypto assets. The Overnight Finance case follows a comparable playbook, but reaches further by asking for relief through Circle and into a shared protocol contract.

Investor Takeaway

Stablecoin blacklist powers are becoming a market-structure risk for DeFi. They can help preserve disputed assets, but when a court order targets a pooled contract, unrelated users may be exposed to legal action tied to someone else’s deposit.

What Comes Next for Privacy Protocols and DAO Treasuries?

The June 1 hearing will be the first major test after the interim freeze, because the order was issued on an ex parte basis before the opposing side was heard. The court will have to weigh the plaintiffs’ claim that the funds were moved beyond token holders’ reach against the effect of freezing a shared public smart contract. For privacy protocols, the case creates a difficult compliance problem. Protocols built to limit public visibility may still rely on centralized assets such as USDC, whose issuer can freeze backing funds. That means confidentiality at the smart-contract layer does not remove legal exposure at the token-issuer layer. For DAOs and token holders, the case also sharpens the legal question around treasury rights. Governance tokens may allow voting, but disputes can arise over whether that vote creates an enforceable claim on treasury assets. Ermilov argues OVN holders had governance rights only. The plaintiffs argue they had a right to force liquidation based on prior representations and the vote process. The immediate freeze protects the disputed USDC while the court considers emergency relief. The broader impact is more complex. If courts become more willing to freeze commingled protocol contracts in civil disputes, DeFi users may face new counterparty risk from legal proceedings they are not part of. If courts refuse that path, activists trying to recover DAO treasury assets may have fewer practical tools when funds move into privacy infrastructure. The case leaves Circle, Zama, Overnight Finance, and OVN holders inside a single legal and technical dispute. It also shows how fast a governance fight can move from a DAO vote to a federal courtroom and then into the core infrastructure of stablecoin-backed DeFi.