Circle Freezes $12.6M in Zama Funds Following Overnight Finance Inflow

Key Facts

In a move highlighting the regulatory challenges facing privacy protocols in decentralized finance, Circle has blacklisted the cUSDC token contract address belonging to the Zama protocol. According to reports, this action resulted in the freezing of approximately $12.6 million in user funds on the Ethereum network. The freeze was triggered after funds from Overnight Finance flowed into Zama's privacy-preserving wrapper, prompting the USDC issuer to intervene.

This incident occurs at a sensitive time for the stablecoin sector, as issuers strive for strict compliance to avoid regulatory sanctions. Compared to previous events, such as the 2022 blacklisting of assets linked to Tornado Cash, this action underscores the persistent pressure on privacy tools. Per market data, USDC maintains its $1.00 peg; however, liquidity freezes in DeFi protocols raise concerns regarding counterparty risk and the inherent centralization of asset-backed stablecoins.

Traders should watch for further statements from Zama or Circle regarding the potential recovery of the frozen funds, as Zama's co-founder clarified the action targeted specific fund flows rather than the protocol itself. Looking ahead, the market awaits the U.S. Core PCE Price Index release on May 28, 2026, a major catalyst that could influence broader crypto market sentiment and risk appetite.