The freeze imposed on Zama’s confidential USDC (cUSDC) contract has been lifted after a US federal court reversed its earlier temporary restraining order (TRO), restoring access to approximately $12.5 million in USDC that had been locked since Friday, May 29th.
Zama founder Rand Hindi confirmed the reversal on June 1st, stating that the court determined the freeze was unwarranted and that Zama’s cUSDC contract, along with all the USDC held in it, is now fully operational.
The resolution came after Zama’s legal team worked through the weekend to engage with the court and all involved parties. The protocol credited US counsel Mike Frisch from Croke Fairchild Duarte & Beres and Swiss counsel Romedi Ganzoni from MME for the swift turnaround.
How the freeze happened
The chain of events started on May 11th, 2026, when an address shielded roughly $12.5 million worth of USDC into Zama’s cUSDC wrapper contract. The deposit passed Zama’s standard compliance screening at the time, and no sanctions flags were raised.
However, because cUSDC was a newly supported asset on the protocol with minimal prior deposits, that single depositor ended up accounting for over 99% of the total value shielded in the contract.
It was later revealed that the deposit address was tied to a lawsuit filed in the Northern District of California involving a separate project called Overnight Finance. The plaintiffs in that civil dispute sought a blanket freeze on the contract through Circle, the issuer of USDC, and the court granted a temporary restraining order on May 29th without prior notice to Zama.
The freeze sent shockwaves through the market, with the ZAMA token dropping over 18% intraday as traders priced in reputational and liquidity risk. The token fell from around $0.0389 to $0.0318 within hours of the news breaking, accompanied by a 61% spike in 24-hour trading volume.
Zama says incident was circumstantial, not a policy shift
In his detailed post, Hindi emphasized that the freeze was not directed at Zama or at privacy technology. It was purely a byproduct of a civil dispute between Overnight Finance stakeholders, and Zama was never a party to the case.
Hindi also pushed back against any reading of the incident as a signal that stablecoin issuers are adopting a hostile posture toward privacy protocols. He called it a circumstantial case and noted that the same thing could have happened to any protocol holding freezable assets, whether AMMs, lending protocols, or bridges.
The protocol confirmed it still views USDC as a core asset and plans to move forward with its planned cUSDC product launch later this month. As a sign of confidence, Zama announced it will shield $5 million in USDC from its own treasury as part of that launch.
Accelerated compliance roadmap
Perhaps the most significant outcome of the incident is Zama’s decision to accelerate its compliance roadmap. The protocol laid out several concrete steps it plans to take in the coming weeks.
First, confidential tokens will now mirror the compliance actions of their underlying assets. If Circle freezes a specific USDC address, that freeze will automatically propagate to the corresponding cUSDC balance held by that address. This transitive compliance model will apply to all tokens on the protocol that implement freezing functions.
Second, Zama will appoint a dedicated compliance council responsible for reviewing and responding to legal requests directed at the protocol.
Third, the team is working with multiple compliance and Know Your Transaction (KYT) providers to build privacy-preserving integrations that satisfy institutional requirements without breaking the encryption model.
Fourth, Zama plans to join industry organizations focused on combating criminal activity onchain, positioning itself as an active participant in broader blockchain safety efforts.
“We are not a mixer”
Hindi used the post to draw a sharp distinction between Zama’s approach and that of mixing protocols or fully anonymous networks like Zcash.
He explained that funds on Zama are held in regular EVM wallet addresses and remain fully attributable. Transactions are traceable onchain as standard smart contract calls. What the protocol encrypts is the state and transaction data, meaning balances, amounts, and trade direction remain hidden, but the sender and recipient of every transaction are visible.
Hindi compared the model to the difference between Tor and HTTPS. Tor hides a user’s identity and browsing trail entirely, while HTTPS allows transparent interaction with a website but encrypts the data being exchanged, such as credit card numbers or private messages. Zama, he argued, functions as HTTPS for blockchain rather than an anonymity tool.
This distinction matters because Zama is explicitly targeting institutional users: payment providers, exchanges, custodians, banks, RWA issuers, hedge funds, and DeFi applications. Hindi noted that in hundreds of conversations with prospective partners, the consistent feedback was that without strong compliance and AML features built into the protocol, institutions will simply not integrate it.
Broader implications for DeFi
The incident has reignited a long-running debate in decentralized finance about the risks of building on top of centrally controlled stablecoins. Circle’s ability to freeze an entire protocol contract based on a court order, without notifying the protocol operator beforehand, highlights a tension that extends far beyond privacy use cases.
Any DeFi protocol that holds USDC in its contracts, from automated market makers to lending pools to cross-chain bridges, faces the same theoretical exposure. A single court order targeting one depositor’s funds can, in the right circumstances, result in a blanket freeze affecting all users of that contract.
Zama’s account-based architecture, powered by Fully Homomorphic Encryption (FHE), offers one potential answer to this problem. Because each onchain address maintains its own balance of confidential tokens, compliance actions can be applied at the individual account level rather than requiring a freeze on the entire contract. Token issuers retain the ability to define which compliance rules apply to their confidential asset contracts, making compliance programmable at both the asset and account levels.
ZAMA token recovering after sharp sell-off
At the time of writing, the ZAMA token is trading around $0.034 with a market capitalization of roughly $75 million, according to CoinGecko data. The token has partially recovered from its post-freeze low of $0.0318 but remains below its pre-incident levels near $0.039.
The circulating supply stands at 2.2 billion ZAMA out of a total supply of 11 billion, with the token listed on major exchanges including Binance, OKX, Kraken, and KuCoin.
Whether the court reversal and Zama’s compliance commitments are enough to fully restore market confidence remains to be seen. But the speed of the legal resolution and the protocol’s willingness to adopt transitive compliance measures signal that Zama is betting its future on being the institutional-grade privacy layer for onchain finance, not a tool for anonymity.
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