Privacy 'Flipped' as Circle Freezes $12.6 Million..."USDC Can Be Frozen in an Instant"

▲ Circle, USDC, Cryptocurrency Freezing/AI Generated Image

Circle blacklisted Zama's confidential USDC contract, freezing $12.6 million in funds. The conflict between privacy DeFi and centralized stablecoins has once again come to the fore.

According to crypto media outlet BeInCrypto on May 30 (local time), Circle, the issuer of USDC, blacklisted Zama's confidential USDC contract based on Ethereum (ETH). This action resulted in approximately $12.6 million in funds held in the cUSDC token contract being frozen.

Due to this freeze, cUSDC holders are unable to redeem their tokens for regular USDC. Zama's privacy protocol utilizes Fully Homomorphic Encryption (FHE) to conceal balances and transaction amounts on public blockchains. The problem is that even with this structure, Circle can block transfers to and from specific addresses using the blacklist function embedded in the USDC smart contract.

Circle has not publicly explained the specific reasons behind this decision. BeInCrypto reported that past USDC freezes have been associated with sanction orders, court directives, and suspicions of illegal activities. In 2022, Circle blacklisted related USDC after the U.S. Treasury Department sanctioned Tornado Cash.

On-chain investigator ZachXBT traced the frozen underlying funds to a wallet that deposited 12.4 million USDC into Zama on May 11. This wallet was found to be associated with Overnight Finance. Overnight Finance recently conducted a Snapshot governance vote for treasury fund distribution after holders raised suspicions of the team preparing a rug pull.

BeInCrypto pointed out that the issue of fund commingling is at the core of this matter. Even if the action targets a specific address, if the entire contract where Zama user funds are co-mingled is frozen, cUSDC holders unrelated to the issue could also lose their redemption path. Currently, there is no clear way for cUSDC holders to recover their funds while the freeze remains in effect.

Zama and Circle have not yet issued a public statement regarding affected users. This decision serves as an example of the control risks that privacy projects undertake when building services on top of centrally issued stablecoins.

*Disclaimer: This article is for investment reference only, and we are not responsible for any investment losses based on it. This content should be interpreted for informational purposes only.*