Circle froze roughly $12.6 million in USDC early Saturday morning by blacklisting the Ethereum contract behind open-source cryptography firm Zama's confidential USDC token, dragging a privacy protocol into a dispute it apparently had no direct part in.

The blacklist hit the cUSDC contract at 1:08 a.m. UTC, locking 12,606,386 USDC. Public block explorers label the frozen address as Zama's confidential USDC token.

Rand Hindi, co-founder and CEO of Zama, said on X that the company was looking into the freeze. He later wrote that the contract appeared to have been "caught in a crossfire of another case." Hindi also said he was given no warning by Circle prior to the freeze.

Overnight Finance class action suit

That case is a class action suit filed May 28 in the U.S. District Court for the Northern District of California. Three funds that hold Overnight Finance's OVN token accuse the protocol's creator, Maxim Ermilov, of diverting more than $15 million from a shared treasury. The filing describes Ermilov as a Russian national who has said he lives in Abu Dhabi. Ermilov built Overnight Finance, a DeFi yield platform that issued the USD+ stablecoin and the OVN governance token, following an $850,000 pre-seed raise led by Hack VC in Feb. 2022. 

Ermilov sold OVN beginning in Sept. 2023 by promising holders a pro rata claim on the treasury and the right to vote on what happened to it, the complaint says, quoting a Nov. 6, 2024 Discord message in which Ermilov wrote "you can buy 51% of OVNs and vote to have [the Treasury] distributed." OVN holders later initiated a vote on May 4, 2026, to liquidate the treasury and pay themselves out. 

Just before the vote crossed a majority on May 11, the lawsuit alleges Ermilov shifted more than $15.77 million out of the treasury wallets and into a new address. About $12.5 million of it was USDC, with roughly $14 million in total bridged to Ethereum, and the bulk landed in Zama's confidential contract, the same contract frozen on Saturday morning.

Ermilov, responding to questions from The Block, disputed the plaintiffs' allegations and said OVN holders had no right to force a treasury distribution. He characterized at least some of the people involved in the vote as "raiders" and said he had been "harassed by these people over two years."

"They had no right to vote the way they did," Ermilov said. "OVN is not a security, so no rights to profit or distributions of any nature," he added, arguing that the token gives holders only governance rights over protocol operations and smart contracts.

Ermilov also disputed the plaintiffs' characterization of the wallets as treasury wallets, calling them externally owned accounts that held mostly personal or team funds. He said the funds included proceeds from OVN token sales by the team (which he said numbers approximately 15 people), yield farming involving OVN and USD+ tokens, and revenue from operating the protocol, and that some of the funds were used to support development.

Asked why funds were moved into Zama's confidential USDC system, Ermilov said the move was meant to "hide balances from general public to minimize personal security risks," citing recent kidnappings of crypto holders.

Plaintiffs seek emergency freeze

The plaintiffs paired the complaint with an emergency application asking the court to freeze the assets, direct Circle to blacklist them, and let them serve Ermilov by email and Discord. On May 29, U.S. District Judge P. Casey Pitts issued a text-only order directing Circle to block the USDC in that wallet and set a hearing on the restraining order for Monday, June 1. Circle carried out the freeze that evening, Eastern Time (early Saturday morning UTC).

Because cUSDC is a wrapper that holds the USDC backing every confidential token holder, blacklisting the contract locks the entire pool rather than one person's deposit. The 12.6 million USDC frozen is slightly more than the disputed deposit, which suggests other users' funds were swept in alongside it. Plaintiffs told the court in a declaration that the treasury assets comprised nearly all of the Zama Wallet and that they were prepared to advance funds to make unrelated parties whole.

"Since there wasn't much utility yet for the cUSDC wrapper, there were very little funds in it, and as a result the vast majority (>99%) of funds in the cUSDC contract came from that single hacker's deposit," Hindi wrote on X, noting that the depositing address did not appear on any sanctions lists. Hindi also said Zama will pause the cUSDC, cUSDT and cWETH contracts until the firm has finished its investigation, identified all addresses linked to this case, and taken appropriate action. 

"This is an example of collateral damage affecting a public smart contract due to the centralised architecture of the underlying asset. Zama is an infrastructure provider, not a mixer or a tumbler," Zama said in a statement to The Block. "Our legal team is already in communication with US counsel and relevant parties to isolate the flagged address and restore access for all innocent pool participants as quickly as possible."

Onchain investigator ZachXBT, who flagged the freeze, called it "precedent setting" to blacklist a protocol contract where funds are commingled with other users. "Overall I feel bad for Zama users who have now been indirectly impacted with this mess of a US civil case," ZachXBT wrote. 

The complaint frames the Zama transfers as an attempt to hide the money, describing the contracts as designed to enhance secrecy. Zama's system masks the amounts of later confidential transfers, but the initial USDC deposit posted to the public ledger, which is apparently how analysts traced it within hours. "It's also really useless for hackers to try to use Zama to hide their trail as we are precisely not a mixer and we do not obfuscate the sender and recipient, only balances and amounts," Hindi wrote on X. 

A familiar playbook

The funds behind the suit are not casual token holders. One co-plaintiff, Patagon Management, is a proprietary trading firm run by Diogenes Casares that has built a practice out of pressuring DAOs and protocols to liquidate their treasuries and return value to token holders.

Casares is associated with a loose group of crypto activists sometimes called the RFV Raiders, shorthand for risk-free value. Casares has said the broader RFV community has unwound DAOs including Fei Protocol, Rome DAO, and Temple DAO and shaped the governance of others such as Olympus, Redacted Cartel, and Time Wonderland. "Collectively, these protocols have Risk-Free assets in excess of $1B," Casares wrote in Jan. 2023. 

The most direct analogue is the Spartacus DAO. Patagon previously sued Wei "Max" Wu over the project, an Olympus fork whose holders had voted to dissolve it and reclaim the treasury after the founder pressed ahead alone. Judge Victor Marrero granted an ex parte restraining order and then a preliminary injunction barring Wu, anywhere in the world, from moving the Spartacus assets. With Wu a no-show, Patagon served him by NFT, email, and Discord, the same crypto-native channels the Overnight plaintiffs now want to use on Ermilov.

In the Spartacus case, the court restrained Wu from accessing $35 million in crypto. The Overnight plaintiffs reached further, through Circle and into a contract that pools other users' funds.

Patagon pursued a similar strategy against the Aragon Association, where the DAO voted to fund a lawsuit against its own founding team, as The Block previously reported, and routed $300,000 in USDC to the firm. Patagon then sued the Aragon entities and co-founder Luis Cuende, again pairing the complaint with an application for emergency relief.

One plaintiff in the Overnight Finance suit brings its own history with this tactic. Newton AC/DC Fund, joined here by co-plaintiff Scallion Trading, once sought a similar order against Hector DAO, asking a New Jersey court to direct Circle to block USDC in a disputed wallet. That court denied the request. Newton and Scallion, along with Stanton Street, sued Circle directly in the Southern District of New York last October over a separate matter.

A widening freeze debate

The freeze revives criticism from March, when Circle blacklisted 16 unrelated business wallets over a separate sealed civil case, a move ZachXBT called one of the most "incompetent" he had seen. Circle later unfroze one of the wallets. Detractors argue Circle's freeze power has been slow against thefts but broad in private disputes, while the company maintains it acts only on court or law enforcement orders.

Because the Zama freeze order came on an ex parte motion, no one on the other side has been heard yet. The court set a June 1 hearing on the emergency TRO after issuing an interim text-only order. Circle, the plaintiffs' counsel, and Casares did not immediately respond to requests for comment from The Block. 

Updated at 8:50 a.m. ET to include responses from Ermilov received after publication.