A US federal court directive has led stablecoin issuer Circle (NYSE:CRCL) to blacklist the Ethereum smart contract powering Zama’s confidential USDC (cUSDC) wrapper, effectively locking up about $12.6 million in pooled funds. This move, carried out around May 30, 2026, has disrupted users of the privacy-enhancing protocol who were uninvolved in the underlying civil dispute.
The situation traces back to a class-action complaint filed on May 28, 2026, in the US District Court for the Northern District of California.
Plaintiffs—investment funds holding Overnight Finance’s OVN governance token—allege that project founder Maxim Ermilov transferred more than $15 million from what they describe as shared treasury wallets shortly before a community proposal to wind down the protocol and return assets to token holders.
Court records indicate that roughly $12.5 million in USDC from these movements was bridged to Ethereum and deposited into Zama’s cUSDC contract on May 11, comprising over 99% of the wrapper’s total balance at that point.
Zama’s technology relies on fully homomorphic encryption to keep token amounts and balances private on-chain, while sender and recipient addresses remain visible.
The cUSDC contract serves as a pooled wrapper for these confidential tokens. Blacklisting the contract address as a whole—rather than targeting a specific wallet—impacted the entire pool, halting redemptions for all cUSDC holders.
Zama co-founder and CEO Rand Hindi addressed the incident publicly, calling it “collateral damage” from an external legal matter.
He noted that the team received no advance notice from Circle before the blacklist took effect.
In response, Zama paused its related confidential token contracts (cUSDC, cUSDT, and cWETH) to conduct a thorough review.
The protocol is now working with legal advisors to identify and isolate the disputed deposit, aiming to restore access for unaffected participants as quickly as possible.
Ermilov has contested the plaintiffs’ claims, maintaining that OVN token holders only possess governance rights over protocol operations and lack authority to mandate treasury distributions or treat the assets as profit-sharing entitlements.
He described the relevant wallets as containing personal and team resources accumulated from token sales, yields, and other revenues.
The decision to route funds through Zama’s privacy wrapper was framed as a security measure against potential targeted risks in the crypto space, with Ermilov insisting the transfers were proper.
Thanks to @zachxbt, we found the root cause and will be taking the appropriate actions to unblock the situation. Tldr; this has nothing to do with Zama, or privacy.
The issue stems from an address related to the Overnight Finance hack, which deposited over ~$12.5m USDC into our… https://t.co/PThaUVEwAH
— Rand (@randhindi) May 30, 2026
The plaintiffs, including entities like Patagon Management with prior experience in DeFi activist actions and asset freezes, secured a temporary restraining order from Judge P. Casey Pitts on May 29.
A hearing on the matter is set for June 1. On-chain observers, including investigator ZachXBT, have drawn attention to the case, noting its implications for pooled privacy tools and the reach of court-mandated blacklists.
This incident highlights ongoing frictions in decentralized finance: reliance on centralized stablecoins like USDC introduces compliance choke points that can spill over into unrelated protocols.
Zama has emphasized that its infrastructure is designed for compliant confidentiality—it does not function as a mixer and preserves visibility into transaction parties while shielding amounts.
The protocol’s team has committed to a detailed post-mortem and future safeguards for handling similar requests. As the June 1 hearing nears, the crypto sector is watching to see whether the freeze can be narrowed or lifted, potentially freeing most of the locked liquidity.