Circle Freezes $12.6M USDC in Zama Protocol, Sparks Criticism

Stablecoin issuer Circle has frozen $12.6 million in USD Coin (USDC) tied to Zama, a privacy-focused protocol, according to on-chain analyst ZachXBT. The freeze, which reportedly occurred without prior notice, has reignited criticism over Circle’s ability to unilaterally blacklist addresses and confiscate funds at the smart-contract level.

According to ZachXBT, the affected funds were linked to Zama’s confidential USDC (cUSDC) smart contract. The smart contract was publicly labeled on blockchain explorers, and $12.4 million had been deposited into it by wallets associated with the DeFi protocol Overnight Finance earlier in May. Overnight Finance itself recently faced allegations of misappropriating treasury funds, further muddying the waters.

“From my understanding, the Zama team does not appear to have been notified of the Circle freeze prior,” ZachXBT stated. This lack of communication has drawn sharp criticism from the crypto community, particularly since Zama users’ funds appear to have been caught in the crossfire.

Selective Enforcement and a Growing Backlash

This isn’t the first time Circle has come under scrutiny for its handling of USDC freezes. The company has been accused of selectively enforcing freezes—acting swiftly in some cases while allegedly neglecting others. For example, following the $270 million Drift Protocol exploit in April 2026, Circle faced backlash for failing to freeze $232 million in stolen funds, despite reportedly having a six-hour window to act.

Critics argue that Circle’s actions reveal inconsistencies in its enforcement policies. While Circle claims freezes are executed only under legal directives, cases like Zama’s suggest a lack of transparency and due process for legitimate crypto projects. ZachXBT also highlighted Circle’s failure to freeze approximately $420 million in funds tied to fraud and exploits in 15 separate cases since 2022.

Centralization Risks in Stablecoins

USD Coin, one of the largest dollar-pegged stablecoins with a market cap of $76.37 billion as of May 30, 2026, is often lauded for its regulatory compliance. However, its centralization has long been a point of contention. Circle retains full control over blacklisting addresses and freezing funds, a feature that contrasts sharply with decentralized protocols and raises concerns about overreach.

Notably, Circle CEO Jeremy Allaire defended the company’s actions in April, stating that freezes occur only under legal obligations, not internal discretion. Yet, the Zama case, which lacks clear legal context, is likely to amplify calls for better oversight and accountability in stablecoin management.

Market Reaction

The market impact of the freeze appears limited for now. USDC remains stable, trading at $0.9997 as of May 30, with a negligible 24-hour price change of -0.01%. However, the incident underscores ongoing concerns about the centralized control of fiat-backed stablecoins and their vulnerability to unilateral actions.

As regulatory scrutiny around stablecoins intensifies globally, incidents like Zama’s may serve as a wake-up call for both issuers and lawmakers to address the tension between compliance, user protections, and the principles of decentralization.

For investors and traders, the case highlights the importance of understanding the trade-offs inherent in centralized stablecoins like USDC. While they offer liquidity and regulatory assurances, the potential for abrupt freezes remains a risk factor that cannot be ignored.

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