Circle blacklisted a smart contract tied to Zama’s privacy protocol on May 30, freezing about $12.6 million in USDC. The move locks out holders of confidential USDC (cUSDC) tokens from redeeming them for standard USDC. It’s the latest flashpoint in the ongoing tension between centralized stablecoin issuers and decentralized privacy projects.
What Circle did
Circle maintains a built-in blacklist on the USDC smart contract. Blacklisted addresses can’t send or receive the stablecoin. The frozen contract is an ERC-1967 proxy that holds USDC on behalf of cUSDC token holders. Circle hasn’t publicly explained the decision. Past freezes followed sanctions orders, court directives, or suspected illicit activity.
The funds and the dispute
On-chain investigator ZachXBT traced the underlying funds to a wallet that deposited 12.4 million USDC into Zama on May 11. That wallet appears to belong to Overnight Finance. Overnight recently held a Snapshot governance vote to distribute treasury funds after holders alleged the team was preparing to rug pull. The dispute may have triggered the freeze. Innocent cUSDC holders could be locked out alongside any targeted address due to commingled funds.
Privacy vs. central control
Zama’s protocol uses fully homomorphic encryption (FHE) to conceal balances and transfer amounts. The freeze exposes a recurring tension: Circle retains unilateral power to freeze funds despite decentralized infrastructure. Critics have long warned that centralized issuers create chokepoints. The debate intensified after Circle floated reversible USDC plans. Similar concerns surround Coinbase’s ability to blacklist staked Ethereum through its smart contracts.
No way out yet
Holders of cUSDC have no clear path to recover their funds while the freeze remains in place. Zama and Circle have yet to issue public statements. Circle could reverse the action or provide justification. The decision is expected to shape how privacy projects evaluate building atop centrally issued stablecoins.
