Circle's blacklist of Zama's confidential USDC contract froze $12.6 million in user funds, marking a new escalation in issuer control over privacy-focused DeFi protocols.
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Circle freezes $12.6M in Zama cUSDC, exposing stablecoin control risks
Circle's blacklist of Zama's confidential USDC contract froze $12.6 million in user funds, marking a new escalation in issuer control over privacy-focused DeFi protocols.
Circle blacklisted Zama's confidential USDC contract on Ethereum on May 30, freezing roughly $12.6 million held in the cUSDC token contract and blocking holders from redeeming tokens for standard USDC. The action prevents holders of confidential USDC from converting their tokens into the underlying stablecoin.
On-chain investigator ZachXBT traced the underlying funds to a wallet linked to Overnight Finance, which deposited 12.4 million USDC into Zama on May 11, according to blockchain data. Overnight Finance recently held a Snapshot governance vote to distribute treasury funds after holders alleged the team was preparing to rug pull, and the dispute may have triggered the freeze.
The frozen contract is an ERC-1967 proxy that holds USDC on behalf of cUSDC token holders. Zama's protocol uses fully homomorphic encryption to conceal balances and transfer amounts on public chains. Circle has not publicly explained the decision, though past freezes have followed sanctions orders, court directives, or suspected illicit activity. The company blacklisted Tornado Cash-linked USDC in 2022 after the U.S. Treasury sanctioned the mixer.
The commingling of funds means innocent cUSDC holders may be locked out alongside any targeted address, with no clear path to recovery while the freeze remains in place. The decision is expected to shape how privacy projects evaluate building atop centrally issued stablecoins.
The freeze exposes a recurring tension between privacy protocols and fiat-backed stablecoins. Circle retains unilateral power to freeze funds despite its decentralized infrastructure. Critics have long warned that centralized issuers create chokepoints, a debate that intensified after Circle floated reversible USDC plans that would allow transaction rollbacks under certain conditions. Similar concerns surround Coinbase's ability to blacklist staked Ethereum through its smart contracts.
"We are investigating the cUSDC contract freeze. I will update here as the situation progresses," Rand Hindi, CEO of Zama, said on X.
Circle could reverse the action or provide justification. The outcome may influence whether privacy-focused DeFi protocols continue integrating fiat-backed stablecoins or shift toward more censorship-resistant alternatives such as DAI.
This article is for informational purposes only and does not constitute investment advice.
