On the 30th of May, a federal judge ordered Circle [USDC] to freeze about $12.6 million in USDC.
To accomplish this, the Ethereum contract underlying the private USDC token of open-source cryptography company Zama was blacklisted. And that brought a privacy protocol into a dispute in which it apparently had no direct involvement.
Expressing shock with this unexpected move, Rand Hindi, co-founder and CEO of Zama, noted,
It seems our confidential USDC contract was caught in a crossfire of another case.
Circle’s unusual move sent shockwaves
ZachXBT the pseudonymous blockchain investigator, also noted,
This is a dramatic twist, given ZachXBT had earlier recorded 15 distinct instances of USDC theft totaling $420 million in which Circle had done nothing.
Circle executives have publicly stated that they only freeze when required by law, not during hacks or upon request.
Was the sanction valid against Zama?
Henceforth, Zama’s team explained that the problem was actually related to money from the Overnight Finance hack, as there were worries that Zama’s confidential assets protocol had been sanctioned.
At a time when compliance tools had not flagged or sanctioned it, a wallet linked to the exploit had transferred over $12.5 million USDC into Zama’s cUSDC wrapper. A recent restraining order, however, focused on the hacker’s wallets.
Since the cUSDC contract was rarely used and more than 99% of its funds came from that one deposit, authorities asked that the entire wrapper contract be frozen. This was to keep the hacker from accessing the assets.
Zama’s co-founder stressed that the action did not target its privacy technology and noted,
So the sanction was not against Zama, or against privacy. It was a classic restraining order as we see often in DeFi, and we should have been notified so we could have taken the appropriate actions on our side.
While creating a thorough post-mortem on the incident, the team has temporarily halted cUSDC, cUSDT, and cWETH. That is to comply with the investigation and identify all wallets connected to the case.
The ongoing debate around centralization
That said, the freeze highlights a persistent conflict between stablecoins and privacy protocols. Despite its decentralized infrastructure, Circle maintains the authority to unilaterally freeze funds.
As expecetd, critics have long cautioned that chokepoints are created by centralized issuers.
In the midst of all of this, Circle is stepping up its efforts to penetrate the institutional payments infrastructure. They claim that stablecoin-based settlement systems can take the place of the batch-processing model that is still prevalent in a large portion of the global financial industry.
Final Summary
- The frozen funds by Circle were actually linked to the Overnight Finance exploit and not at all related to any issue persisting at Zama.
- Circle’s ability to freeze funds has reignited the concerns around the centralized nature of fiat-backed stablecoins and privacy protocols.
