Circle’s Freeze Function Under Legal Fire: Yield Incentive Flagged in Unreturned USDC Cases
A Wisconsin criminal complaint and a New York prosecutors' letter to Congress allege Circle sat on frozen USDC tied to scam victims rather than return it.
Circle, issuer of USDC, is the subject of a criminal complaint filed in Wisconsin and a separate letter sent to Congress by New York prosecutors, both alleging the company repeatedly failed to freeze or return crypto assets tied to scam victims, according to reporting from the International Consortium of Investigative Journalists (ICIJ).
The mechanics: reserves keep earning while tokens stay frozen
The core allegation is structural rather than incidental. As long as frozen USDC is never unwound and returned to victims or law enforcement, Circle can reportedly keep earning yield on the reserve assets backing those tokens.
The New York prosecutors’ letter, cited by ICIJ, spells out the alleged commercial logic directly: “Circle’s motive for not assisting law enforcement becomes crystal clear: it is financially preferable to only freeze cryptocurrency deemed to have been stolen, but not return the underlying asset to law enforcement or any fraud victim, because Circle can continue to collect the interest through investment of the underlying funds.”
For an issuer holding billions in reserves parked in short-duration Treasuries and repo, that dynamic converts delayed enforcement compliance into a direct line item on the P&L — every day a freeze goes unresolved is a day the underlying reserve keeps generating income for Circle rather than being returned.
A dozen-plus documented cases behind the Wisconsin filing
Milwaukee County police detective Scott Simons told ICIJ he has documented more than a dozen instances across the US where Circle either declined a law enforcement freeze request or where a compelling court order arrived too late to be actionable.
That pattern underpins a criminal complaint filed by prosecutors in a southeastern Wisconsin county, which accuses Circle of ignoring a warrant that ordered recovery of a victim’s stolen assets. Circle has pushed back, calling the complaint meritless and asking the court to dismiss it, per the ICIJ report — while not disputing how USDC’s freeze mechanism itself functions.
What this means for USDC’s compliance premium
USDC’s blacklist function — the ability to freeze tokens at specific addresses — has been positioned as a compliance edge over more decentralized stablecoins. These allegations complicate that pitch by suggesting the tool is applied inconsistently, with law enforcement in at least two states now escalating past routine compliance channels into criminal filings and congressional correspondence.
For traders and analysts tracking stablecoin issuer risk, this adds a concrete regulatory data point to USDC’s profile at a time when reserve transparency and consumer-protection obligations are already under scrutiny sector-wide. Any ruling against Circle in the Wisconsin case, or follow-up action stemming from the New York letter, could establish precedent for how fast and how unconditionally issuers must act on freeze requests — a variable worth watching against Circle’s disclosed reserve income going forward.
Read more: Convicted Launderer Charged With Rerouting $290K in Forfeited Crypto From Cell