The freeze on Zama's cUSDC contract has been lifted and all systems are back to normal

On Friday May 29th, without any prior notice to us, a US court ordered Circle to temporarily freeze one of Zama's protocol contracts holding USDC. This was not aimed at Zama or at privacy; it was aimed at freezing funds tied to an ongoing dispute between the stakeholders of a different, unaffiliated protocol, Overnight Finance.

The same court has now lifted the freeze, determining that it was unwarranted. Zama's cUSDC contract, along with all the USDC held in it, are now back to normal. This swift turnaround was made possible thanks to collaboration between the parties involved.

What Happened

Zama's confidential USDC (cUSDC) contract is a wrapper around USDC: users deposit USDC and receive an equivalent amount of cUSDC, where their balances and transaction amounts are encrypted. This enables important use cases such as private payments, confidential swaps, and other financial applications.

On May 11th 2026, someone shielded approximately $12.5M USDC. The deposit was screened through our standard compliance processes, and no sanctions flags were identified. Unlike Confidential USDT (cUSDT), which has been used extensively in the Zama Protocol with over $129M in USDT cumulatively shielded, cUSDC is a newly supported asset for which we were about to launch a major offering. As a result, a relatively small amount was shielded in it prior to this deposit, and thus the depositor ended up accounting for more than 99% of the cUSDC Total Value Shielded (TVS).

It was later discovered that this deposit address was the subject of a lawsuit and request for a temporary restraining order (TRO) filed in federal court in the Northern District of California concerning a project called Overnight Finance. Because the vast majority of the funds in the contract were tied to this private civil dispute, the plaintiffs sought a blanket freeze via Circle. Despite not being a party to the case, Zama proactively engaged with the court and involved parties to resolve the situation promptly.

While we always expected we might be drawn into cases like this at some point, our assumption was that we would be warned beforehand. We believe this was a circumstantial case, and that it does not reflect Circle's posture, or that of any other stablecoin issuer, on freezing assets held by a protocol. Doing so would raise significant concerns for composability between onchain financial services. What happened to the Zama protocol could have happened to any protocol holding freezable assets, whether AMMs, lending protocols, or bridges, and we are glad the court has reversed the TRO.

Moving Forward

So where does this leave us going forward?

First, we would like to reiterate that this incident has not eroded our trust in USDC as a core asset to support in the Zama Protocol and build confidential products around. We will move ahead with our planned cUSDC product launch later this month and shield $5m USDC from our own treasury in the process.

Second, we will accelerate our compliance roadmap and take a strong, proactive approach towards defining a standard framework for compliant onchain privacy. Our goal is to serve legitimate financial institutions: payment providers, exchanges, custodians, banks, RWA issuers, DeFi apps, hedge funds, and other financial participants more broadly. One thing that came out of our hundreds of conversations with prospective users and partners is that without strong compliance and AML features built into the Zama protocol, they will simply not integrate it.

It is also important to highlight that Zama is not a mixer. Funds are held in regular EVM wallet addresses and are therefore attributable, not anonymized. Transactions are simple calls to smart contracts and are traceable onchain, but the onchain state and transaction data are encrypted. A good analogy is Tor versus HTTPS: Tor lets people browse anonymously by hiding their identity and trace, whereas HTTPS lets people interact with websites transparently, but encrypts the data being exchanged such as credit card information and private messages. Zama is HTTPS for blockchain: we do not hide the sender and recipient of a financial transaction, only its contents such as balances, amounts, trade direction etc.

Programmable Compliance with FHE

This incident also reinforces the importance of ongoing monitoring, not just point-of-entry screening, which is where Zama’s account-based model and FHE shines: while the wrapper contract holds all underlying tokens deposited, each onchain address has its own balance of confidential tokens and can thus be acted on individually. Token issuers can decide which compliance rules to implement in their confidential asset contracts, just like they can decide which rules apply to their regular ERC-20 token contracts. Compliance and disclosure become programmable at both the asset and account levels.

While we are still refining the exact compliance framework, we have already decided to take the following actions:

• Confidential tokens will mirror the compliance actions of their underlying asset: for example, if Circle freezes a USDC address, it will propagate automatically and freeze the corresponding cUSDC held by that address. This transitive compliance will apply to all tokens that implement freezing functions.
• In the coming weeks, the protocol will appoint a compliance council responsible for reviewing and responding to legal requests
• We are working closely with several compliance and KYT providers to determine how best to integrate with them in a privacy-preserving way.
• We will join relevant industry organizations to take an active role in fighting against criminal activity onchain and help make blockchain safer overall.

We know there is an active debate about privacy on blockchains. There are many approaches, and Zama is not trying to be everything to everyone, or compete with the likes of Zcash. We are building products for a specific segment of users: financial institutions, DeFi protocols and other legitimate financial service providers, which expect to have the same level of confidentiality and compliance onchain as they are accustomed to offchain.

Acknowledgements

‍Thank you to our legal counsels for having worked on this over the weekend and swiflty resolve the issue:

• ‍US counsel: Mike Frisch from Croke Fairchild Duarte & Beres
• Swiss counsel: Romedi Ganzoni from MME

This post reflects our understanding as of June 1, 2026. It is not intended as legal advice or a complete account of the referenced proceedings.

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