Circle Freezes $12.6M in Zama Confidential USDC Contract
On-chain researcher ZachXBT said May 31 that Circle Internet Group blacklisted a smart contract belonging to Zama, freezing roughly $12.6 million in user funds. The contract held a confidential version of USD Coin (USDC) built on Zama’s fully homomorphic encryption technology.
No regulatory body had publicly said it ordered the action as of the time this story was filed. The freeze reignites a long-running debate about whether stablecoin issuers hold too much unilateral power over user assets.
What Happened
ZachXBT posted his findings on May 31, saying Circle added the Zama confidential USDC contract address to its on-chain denylist.
Once blacklisted, the address cannot transfer or redeem USDC tokens. The $12.6 million was effectively trapped at the contract level, not at the user wallet level, meaning individual holders could not independently move the funds out.
Circle, the issuer of USDC, embeds a blacklisting function directly into the token’s smart contract.
The company has used this mechanism in the past to comply with law enforcement requests and sanctions orders. It is a design feature common among regulated stablecoin issuers.
A stablecoin is a cryptocurrency designed to maintain a fixed value against a reference asset, typically the U.S. dollar.
Zama builds privacy-preserving infrastructure using fully homomorphic encryption, a cryptographic technique that allows computations on encrypted data without first decrypting it. The Zama USDC product, sometimes referred to as cUSDC, used this technology to make on-chain transfers confidential while still settling in USDC.
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Background
Circle has blacklisted addresses before, most visibly during the August 2022 Tornado Cash sanctions issued by the U.S.
Treasury’s Office of Foreign Assets Control. In that case, Circle froze dozens of wallets connected to the mixing protocol within hours of the OFAC designation.
The Tornado Cash episode drew heavy criticism from decentralized finance developers who said unilateral issuer control undermined the censorship-resistance properties of public blockchains.
The Zama freeze is different in one notable respect. Tornado Cash was a mixing service formally designated by a U.S. regulator.
Zama is a cryptography company with no publicly known sanctions designation as of May 31. The absence of a stated legal trigger makes this action more unusual and harder for affected users to challenge.
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What Comes Next
Circle had not issued a public statement explaining the blacklisting action as of the time this story was filed on May 31.
Zama had also not published a response. The lack of disclosure from either party is itself a point of friction.
Governance advocates in the DeFi space have long pushed for stablecoin issuers to publish a transparency log of all blacklisting events, along with the legal basis for each action.
If a regulatory order did trigger the freeze, affected users may have a defined path to petition for release of funds. If the action was taken at Circle’s discretion, the legal and procedural options are considerably narrower.
The outcome will likely influence how future privacy-layer USDC products are structured and whether developers will seek issuers with weaker or no blacklisting capability.
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