Circle freezes $12.6M of USDC linked to privacy protocol Zama

Crypto Insight Summary: Circle froze $12.6 million in USDC stablecoins linked to the privacy protocol Zama's confidential USDC smart contract on Saturday, according to onchain investigator ZachXBT. The exact reason for the freeze remains unclear, but ZachXBT stated it likely relates to an ongoing but unrelated civil court case, noting that the affected smart contract is publicly labeled on block explorers and in Zama's technical documentation. Wallets associated with the Overnight Finance DeFi protocol had deposited $12.4 million into Zama on May 11, 2026, following a governance vote by Overnight Finance to distribute treasury funds after holders alleged the team was conducting a rug pull. The Zama team was not notified of the freeze prior to the action, and Circle did not respond to Cointelegraph's request for comment. ZachXBT called the move "precedent-setting" given that funds were commingled with legitimate Zama users. Circle has faced prior criticism for inconsistently applying its freezing powers, including a March accusation from ZachXBT that it wrongfully froze 16 stablecoin wallets tied to online casinos and legitimate exchanges. The stablecoin issuer has also been criticized for failing to freeze approximately $420 million across 15 incidents of fraud or stolen funds since 2022. Notably, Circle did not act on $232 million in stolen user funds from the April 2026 Drift Protocol hack despite a six-hour window, according to ZachX Crypto Insight Analysis: Direction: Bearish USDC Impact: Minor Impact Horizon: Short-term (1-3 days) Reasoning: Freeze raises concerns about USDC's censorship resistance and Circle's inconsistent policy enforcement.