Privacy chains force broad stablecoin freezes

Circle blacklisted the cUSDC contract on Zama Chain after a court ordered the issuer to freeze specific funds that the network could not isolate. The action removed access for all users of that contract on Zama Chain.

Privacy-focused blockchains can obscure account links and mix multiple users’ assets in single contracts. Those technical features can prevent targeted freezes, so an issuer facing a court order may be able to block either all users tied to a contract or no one.

Jan Philipp Fritsche, founder of Bermuda, pointed to the Zama case as an example. He said Zama Chain lacks a mechanism to freeze individual funds, forcing Circle to blacklist the entire cUSDC contract and affect anyone who had locked tokens in it.

Stablecoin issuers are subject to court orders and regulatory obligations to isolate or freeze assets tied to illicit activity. On chains with visible accounts or traceable tokens, issuers can typically block a specific address or token instance. Privacy protocols that obscure ownership and commingle assets remove that targeting ability.

When technical controls are limited, compliance teams often rely on behavioral monitoring to flag suspicious transfers. Fritsche warned those heuristics are imperfect and described them as educated guesses that can misclassify legitimate activity and trigger restrictions.

Fritsche added that freezes can be inefficient and that sophisticated criminals can adapt to evade asset restrictions. He said that reality raises questions about how effectively freezes stop advanced threat actors.

As an alternative to relying mainly on post-incident freezes, Fritsche urged stronger prevention and improved application security to reduce vulnerabilities that enable theft or misuse. He cited projections that annual global damages from cybercrime could top $10.5 trillion.

Privacy-focused networks are being adopted by some institutions seeking confidentiality. The Zama incident drew attention to a gap between the design of those networks and the practical needs of stablecoin issuers and regulators when carrying out court-ordered freezes.