Circle blacklisted the smart contract behind Zama’s confidential USDC token late on May 29, freezing roughly $12.6 million in USDC and locking out users who had nothing to do with the underlying dispute. The freeze came hours after Judge P. Casey Pitts of the U.S. District Court for the Northern District of California issued a temporary restraining order tied to a class action against Overnight Finance founder Maxim Ermilov. Because Zama’s cUSDC is a pooled wrapper rather than an individual wallet, every depositor in the contract lost access at once. The case is a live stress test of how privacy infrastructure built on a centralized stablecoin behaves when a court reaches in.
A confidential token wrapper is a smart contract that takes a public stablecoin like USDC and re-issues it as an encrypted balance, so holders can transact without broadcasting amounts on the public ledger.
- Circle blacklisted Zama’s cUSDC contract on May 29, freezing approximately $12.6 million in USDC under a federal court order in Newton AC/DC Fund LP et al. v. Maxim Ermilov et al.
- The freeze hit the entire pooled contract, not just the disputed $12.5 million deposit from wallets linked to Overnight Finance, sweeping in unrelated users.
- Zama CEO Rand Hindi said the company received no advance notice from Circle or the court, and the ZAMA token dropped roughly 18% after the freeze became public.
Published: May 31, 2026 09:00 UTC
What triggered the freeze
The order stems from a class action filed May 28 in the Northern District of California, Newton AC/DC Fund LP et al. v. Maxim Ermilov et al. Three funds holding Overnight Finance’s OVN token accuse Ermilov of moving more than $15.77 million from a shared treasury just before a community vote crossed the majority threshold to liquidate the assets. Roughly $12.5 million of that was USDC, and on-chain records show the bulk landed in Zama’s cUSDC contract on May 11.
Judge Pitts signed the temporary restraining order on May 29, directing Circle to blacklist the wallets and assets tied to the alleged transfer. Patagon Management, one of the plaintiffs, used a near-identical playbook in 2023 to secure a $35 million asset freeze in a separate DAO dispute, according to The Block.
Why unrelated users were swept in
Zama’s cUSDC works as a pooled wrapper. When users deposit USDC, the contract holds the collateral and mints encrypted balances representing their share. Circle’s blacklist function operates at the contract level, so freezing the wrapper locks the whole pool rather than any single depositor. The $12.6 million now frozen is slightly more than the disputed $12.5 million deposit, indicating other users’ funds were caught in the freeze.
Rand Hindi, Zama’s CEO, said the company had no warning from Circle or the court before the action and described the contract as “caught in a crossfire of another case,” according to Bitcoin.com News. The protocol’s native ZAMA token fell about 18% in the hours after the freeze became public, per Crypto Times.
Why this matters for confidential stablecoins
Zama’s cUSDC is built on the ERC-7984 standard, which uses fully homomorphic encryption to hide balances while preserving composability with public Ethereum infrastructure. Sender and recipient addresses remain visible on-chain. Zama has publicly stated the system is not a mixer.
The freeze exposes a structural limit that applies to every privacy wrapper built on a centralized stablecoin. The encryption hides amounts from outside observers but does nothing to override Circle’s freeze controls on the underlying USDC. A court order at the issuer level reaches every user in the pool, regardless of whether they had any connection to the case. Tornado Cash sanctions in 2022 raised a similar question for mixers; the Zama case extends it to next-generation confidential token designs that were marketed as a compliance-friendly alternative.
Ermilov, for his part, told the court the funds were moved into cUSDC to “hide balances from general public to minimize personal security risks,” citing recent kidnappings of crypto holders, according to Crypto Briefing.
What comes next
The temporary restraining order is short-lived by design. Judge Pitts will hold a hearing in the coming weeks to decide whether to convert it into a preliminary injunction, which would keep the funds frozen through the litigation. Zama has not said whether it will intervene to protect unaffected depositors. Circle has not issued a public statement on the freeze beyond confirming compliance with the court order.
For the privacy-tech sector, the immediate question is whether confidential wrappers can be redesigned to isolate freezes to individual depositors rather than pooled collateral. Hindi has hinted that Zama is “looking into” the freeze, but no engineering response has been announced. The longer-term question is whether institutional users, the audience Zama was built for, will trust a wrapper that can be neutralized by a single court order at the issuer level.
FAQ
What is Zama’s cUSDC and how does it differ from regular USDC?
cUSDC is a confidential wrapper built on the ERC-7984 standard that uses fully homomorphic encryption to hide balance amounts on Ethereum while preserving USDC as the underlying collateral. Regular USDC balances are publicly visible on-chain. cUSDC hides amounts but not addresses, and it inherits Circle’s freeze and blacklist controls on the underlying USDC.
Why did Circle freeze the entire Zama contract instead of one wallet?
The cUSDC contract holds USDC collateral in a single pool that backs every confidential token holder. Circle’s blacklist operates at the contract address, so freezing the wrapper locks the entire pool. Isolating one user’s funds would require contract-level logic that does not exist in the current Zama deployment.
Can users with funds frozen in the Zama contract get their money back?
Not until the federal court lifts or modifies the restraining order, which is currently set as a temporary measure. Affected users could potentially intervene in the case, but no formal process for unaffected depositor recovery has been announced by Zama, Circle, or the court.
