A federal judge has mandated Circle to blacklist Zama’s confidential USDC (cUSDC) contract, resulting in the immobilization of approximately $12.6 million. This action stems from a class action lawsuit alleging that Maxim Ermilov, the creator of Overnight Finance, utilized the contract to move treasury funds beyond the reach of OVN token holders. The plaintiffs, including activist investors with a history of compelling DAO payouts, such as Patagon Management, are seeking the recovery of these assets.
Key Takeaways
- Circle executed a court order to freeze approximately $12.6 million in USDC by blacklisting Zama’s confidential USDC contract.
- The freeze is linked to a class action suit against Overnight Finance creator Maxim Ermilov, accused of diverting treasury funds.
- Plaintiffs include activist investors known for their success in forcing DAO payouts and asset freezes.
- Zama’s CEO stated the protocol’s contract was “caught in a crossfire” and is investigating the incident.
- Ermilov disputes the allegations, asserting that OVN token holders lacked the authority to liquidate the treasury.
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, drawing a privacy protocol into a dispute it apparently had no direct involvement in. The blacklist affected the cUSDC contract at 1:08 a.m. UTC, locking 12,606,386 USDC. Public block explorers identify the frozen address as Zama’s confidential USDC token.
Rand Hindi, co-founder and CEO of Zama, stated on X that the company was investigating the freeze. He later indicated that the contract appeared to have been “caught in a crossfire of another case” and that Zama received no prior warning from Circle regarding the action.
Regulatory Implications and Precedent
This incident highlights the increasing intersection of decentralized finance, privacy-preserving technologies, and traditional legal frameworks. The court’s order for Circle, a centralized entity, to blacklist a smart contract, even one associated with privacy features, raises significant questions about the extraterritorial reach of judicial orders in the digital asset space. The legal stakes for companies like Circle involve balancing compliance with court mandates against potential impacts on protocol integrity and user trust. For projects like Zama, it underscores the risks of having their infrastructure inadvertently ensnared in off-chain disputes, especially when utilizing privacy-enhancing tools that can be misconstrued or exploited by bad actors. This case could set a precedent for how courts interact with centralized stablecoin issuers in freezing assets held within decentralized protocols, potentially influencing future regulatory approaches to privacy coins and smart contract interactions.
Overnight Finance Class Action Suit
The underlying dispute is a class action suit filed on May 28 in the U.S. District Court for the Northern District of California. Three funds holding Overnight Finance’s OVN token allege that the protocol’s creator, Maxim Ermilov, diverted over $15 million from a shared treasury. The complaint identifies Ermilov as a Russian national residing in Abu Dhabi. Overnight Finance, a DeFi yield platform offering the USD+ stablecoin and OVN governance token, was established following an $850,000 pre-seed funding round led by Hack VC in February 2022.
According to the complaint, Ermilov began selling OVN in September 2023, promising holders a pro rata claim on the treasury and voting rights concerning its disposition. A Discord message from November 6, 2024, quoted in the filing, states: “you can buy 51% of OVNs and vote to have [the Treasury] distributed.” On May 4, 2026, OVN holders initiated a vote to liquidate the treasury and distribute its assets.
The lawsuit contends that just before the vote achieved majority support on May 11, Ermilov transferred more than $15.77 million from the treasury wallets to a new address. Approximately $12.5 million of this was in USDC, with roughly $14 million bridged to Ethereum, and a substantial portion landed in Zama’s confidential contract—the same contract frozen on Saturday morning.
Ermilov, in response to inquiries, refuted the plaintiffs’ claims. He argued that OVN holders were not entitled to force a treasury distribution, characterizing some voters as “raiders” and asserting he had been “harassed by these people over two years.” Ermilov stated, “OVN is not a security, so no rights to profit or distributions of any nature,” maintaining that the token confers only governance rights over protocol operations and smart contracts.
Furthermore, Ermilov disputed the characterization of the wallets as treasury wallets, describing them as externally owned accounts holding primarily personal or team funds. He indicated that these funds comprised proceeds from OVN token sales by the team (approximately 15 individuals), yield farming activities involving OVN and USD+ tokens, and revenue from protocol operations, with some funds allocated to development support.
Regarding the transfer of funds into Zama’s confidential USDC system, Ermilov cited a desire to “hide balances from general public to minimize personal security risks,” referencing recent kidnappings of crypto holders.
Plaintiffs Seek Emergency Freeze
The plaintiffs accompanied their complaint with an emergency application requesting the court to freeze the assets, direct Circle to blacklist them, and permit service on Ermilov via 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 the specified wallet and scheduled a hearing on the restraining order for Monday, June 1. Circle complied with the freeze that evening, Eastern Time (early Saturday morning UTC).
As cUSDC functions as a wrapper holding the USDC that backs every confidential token, blacklisting the contract immobilizes the entire pool rather than an individual’s deposit. The 12.6 million USDC frozen represents slightly more than the disputed deposit, indicating that funds from other users were also included. The plaintiffs informed the court in a declaration that the treasury assets constituted nearly all of the Zama Wallet, and they were prepared to advance funds to compensate unrelated parties.
“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 was not on any sanctions lists. Zama announced it would pause its cUSDC, cUSDT, and cWETH contracts pending the completion of its investigation, identification of all related addresses, and appropriate action.
Zama stated in a release to The Block: “This is an example of collateral damage affecting a public smart contract due to the centralized architecture of the underlying asset. Zama is an infrastructure provider, not a mixer or a tumbler. 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.”
On-chain investigator ZachXBT, who highlighted the freeze, described it as “precedent setting” to blacklist a protocol contract where funds are commingled with other users. ZachXBT expressed sympathy for Zama users indirectly affected by this “mess of a US civil case.”
The complaint characterizes the Zama transfers as an attempt to conceal funds, with the contracts allegedly designed to enhance secrecy. While Zama’s system masks the amounts of subsequent confidential transfers, the initial USDC deposit was recorded on the public ledger, enabling analysts to trace it within hours. Hindi clarified on X, “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.”
A Familiar Strategy
The entities funding this lawsuit are not ordinary token holders. Plaintiff Patagon Management, a proprietary trading firm led by Diogenes Casares, has a documented history of pressuring DAOs and protocols to liquidate their treasuries and return value to token holders. Casares is associated with a group of crypto activists sometimes referred to as the RFV Raiders, known for their involvement in unwinding DAOs such as Fei Protocol, Rome DAO, and Temple DAO, and influencing governance in others like Olympus, Redacted Cartel, and Time Wonderland. Casares stated in January 2023 that these protocols collectively held over $1 billion in risk-free assets.
A notable precedent is the Spartacus DAO case. Patagon previously sued Wei “Max” Wu regarding this project, an Olympus fork whose holders had voted to dissolve it and reclaim the treasury after the founder proceeded independently. Judge Victor Marrero granted an ex parte restraining order and a preliminary injunction preventing Wu from moving Spartacus assets globally. With Wu failing to appear, Patagon utilized NFT, email, and Discord for service, mirroring the crypto-native channels the Overnight plaintiffs now intend to use on Ermilov.
In the Spartacus case, the court restrained $35 million in crypto assets from Wu. The Overnight plaintiffs extended their reach further, engaging Circle and targeting a contract that pools other users’ funds.
Patagon employed a comparable strategy against the Aragon Association. Following a DAO vote to fund a lawsuit against its founding team, $300,000 in USDC was routed to Patagon. Subsequently, Patagon sued the Aragon entities and co-founder Luis Cuende, again seeking emergency relief alongside the complaint.
One of the plaintiffs in the Overnight Finance suit, Newton AC/DC Fund, along with co-plaintiff Scallion Trading, previously sought a similar order against Hector DAO, requesting a New Jersey court to direct Circle to block USDC in a disputed wallet. That request was denied. Newton and Scallion, alongside Stanton Street, filed a separate suit against Circle in the Southern District of New York last October.
Widening Debate on Freezes
This freeze reignites criticisms from March, when Circle blacklisted 16 unrelated business wallets in connection with a separate sealed civil case—a move ZachXBT described as one of the most “incompetent” actions he had witnessed. Circle later unfroze one of the wallets. Critics argue that Circle’s freezing power has been slow to respond to thefts but broad in private disputes, while the company maintains it acts solely on court or law enforcement orders.
As the Zama freeze order was issued on an ex parte motion, the opposing party has not yet had the opportunity to present their case. The court scheduled a hearing for June 1 on the emergency TRO following an interim text-only order. Circle, the plaintiffs’ counsel, and Casares did not immediately respond to requests for comment from The Block.
According to the portal: www.theblock.co