Circle blacklists Zama’s cUSDC, freezing $12.6 million in user funds
Circle Internet Financial blacklisted the smart-contract address for Zama’s confidential USDC (cUSDC) on May 30, 2026, freezing approximately $12.6 million in user funds. The action followed a court-ordered restraining order tied to a civil dispute involving Overnight Finance and its founder, Maxim Ermilov. While Zama is not a defendant in the litigation, the nature of its pooled privacy contract means every depositor is currently locked out of the contract alongside the targeted funds.
The freeze hit Zama’s cUSDC wrapper at 01:08 UTC, according to on-chain investigator ZachXBT, who pegged the exact trapped balance at 12,606,386.10 USDC. Zama uses fully homomorphic encryption (FHE) to allow Ethereum users to mask their balances. This incident marks the largest-dollar instance to date of a stablecoin issuer’s blacklist affecting a composed smart contract, where innocent users are trapped alongside a single targeted depositor.
The situation serves as a stark reminder of the risks inherent in centralized stablecoin governance. While some industry leaders believe finance must move on-chain to remain efficient, the Zama freeze demonstrates that on-chain assets remain vulnerable to traditional legal “kill switches.” Circle has not yet provided a public explanation for the enforcement action beyond compliance with the court order.
Civil litigation triggers massive DeFi contract freeze
The catalyst for the freeze was a private civil dispute involving Overnight Finance, a protocol known for its OVN token. Holders recently alleged that the project team intended to drain the treasury, leading to a Snapshot vote to distribute remaining assets. Plaintiffs in the case, including the firm Patagon Management, are seeking damages against Overnight Finance founder Maxim Ermilov.
A court issued a restraining order on specific wallets linked to the dispute shortly before Circle moved to blacklist the Zama contract. An address allegedly connected to the contested funds deposited roughly $12.4 million USDC into the Zama wrapper on May 11, representing more than 99% of the pool’s total balance. Instead of targeting only the depositor, the court order requested a freeze on the wrapper itself.
The sweeping nature of the order highlights the legal complexities facing decentralized protocols. As lawmakers discuss how the Clarity Act could establish federal rules for digital assets, this case shows that existing civil law can already disrupt major DeFi operations. For now, the entire cUSDC pool remains inaccessible to all participants, regardless of their connection to the Overnight Finance litigation.
Zama responds as privacy protocol becomes collateral damage
Zama CEO Rand Hindi confirmed the investigation into the freeze at 10:37 UTC on May 30. Hindi clarified that the incident was not caused by a failure in Zama’s privacy technology. He also noted that the depositing address was not flagged by Know-Your-Transaction (KYT) monitoring tools during the initial May 11 deposit. As a precaution, Zama has paused its cUSDC, cUSDT, and cWETH contracts while it reviews its compliance procedures.
On-chain investigator ZachXBT defended Zama as an innocent third party in the dispute. He alleged that the plaintiffs may have misrepresented the relationship between the frozen address and the Zama wrapper during court proceedings. Furthermore, reports indicate that the Zama team received no advance notice from Circle before the blacklist was implemented on the Ethereum network.
The composability problem in stablecoin blacklisting
Circle’s blacklist function is part of the USDC ERC-20 smart contract, allowing authorized entities to block specific addresses from sending or receiving tokens. While this mechanism is effective for individual wallets, it is indiscriminate when applied to pooled smart contracts. In these environments, user assets are commingled, making it impossible for the issuer to isolate specific funds without locking the entire contract.
This is not the first time Circle has intervened in a privacy protocol. In August 2022, the company froze approximately 75,000 USDC in Tornado Cash addresses following U.S. Treasury sanctions. However, the Zama incident is nearly 160 times larger in dollar value. Crucially, it was triggered by a private civil restraining order rather than an official government designation from the Office of Foreign Assets Control (OFAC).
Uncertain future for cUSDC holders
Currently, cUSDC holders have no clear path to recover their assets. Circle CEO Jeremy Allaire stated in April 2026 that the company would not freeze USDC without a court order, even in the event of major hacks. While Circle followed that policy here, the outcome has paralyzed a multi-million dollar DeFi bridge over a private legal fight. There is no confirmation on whether Circle will narrow the blacklist or reverse it.
The market reaction to such freezes often drives interest toward alternative protocols with different risk profiles. This was seen when tokens like Near Protocol and Ondo surged earlier in May during periods of shifting capital. For Zama, the priority remains a post-mortem of the event and potential updates to its smart contract architecture to protect users from future “crossfire” incidents.
Until the litigation involving Maxim Ermilov and Overnight Finance is resolved, the $12.6 million remains in limbo. The DeFi community is now watching to see if this sets a precedent where private litigants can effectively shutter decentralized protocols through local court orders. For Zama holders, the wait for liquidity continues as the legal process unfolds.