Circle says it cannot reissue frozen USDC as it seeks dismissal of Wisconsin complaint

Circle has asked a Wisconsin court to dismiss a criminal contempt complaint. It argues it lacks the technical ability to comply with an order requiring it to invalidate frozen USDC and issue replacement tokens to compensate an alleged fraud victim.

The filing centers on the technical limits of USDC once it leaves Circle’s custody. While the stablecoin issuer says it can freeze tokens held in third-party wallets by blocklisting addresses, it argues it cannot seize, destroy, or reissue those tokens because it does not control the wallets’ private keys.

Circle argues it complied with freeze order but could not reissue USDC

The dispute stems from an alleged cryptocurrency scam in which a Wisconsin resident lost more than 381,000 USDC. It was lost after the stablecoins were transferred from Crypto.com to a wallet controlled by an alleged fraudster. 

Prosecutors say Circle froze the assets after receiving a court warrant, but later refused to invalidate the tokens and issue replacement USDC for the victim. This led to a criminal contempt complaint in April.

In its motion to dismiss, Circle says it immediately complied with the initial warrant by blocklisting the wallet address. It prevented the frozen USDC from being transferred. 

However, it argues that the second warrant requires technically impossible actions. This is because the tokens were held in a third-party wallet outside Circle’s control.

The company says it does not possess the private keys to third-party wallets and therefore cannot transfer, invalidate, destroy, or “burn and reissue” USDC stored there. It also argues that it cannot create replacement tokens tied to assets it cannot first invalidate.

Company challenges jurisdiction and cites DOJ discussions

Beyond the technical argument, Circle contends the Wisconsin court lacked jurisdiction to issue parts of the warrant. It says both the company and the property at issue were located outside the state. 

It also argues that the contempt complaint omitted key facts, including its repeated communications with investigators explaining the technical limitations of USDC.

The filing also reveals that Circle has been working with the U.S. Department of Justice on a broader mechanism for compensating victims in federal investigations. According to the motion, those discussions have resulted in a general agreement. 

Under the agreement, Circle could voluntarily issue replacement USDC following a final forfeiture order and a permanent blocklisting order.

Circle has asked the court to dismiss the complaint or, alternatively, hold an evidentiary hearing to consider what it says are critical facts omitted from the original filing.

A test of stablecoin issuers’ technical limits

The case highlights an important distinction in how regulated stablecoins operate. Circle maintains it can freeze USDC by blocklisting blockchain addresses, but cannot directly control tokens held in wallets for which it does not possess the private keys. 

The company argues that technical architecture, rather than policy, limits what actions it can take after USDC enters third-party custody.

If the court addresses those arguments, the case could provide further clarity on the extent to which stablecoin issuers can be compelled to recover or recreate digital assets held on public blockchains.

Final Summary

• Circle has asked a Wisconsin court to dismiss a contempt complaint, arguing it cannot technically invalidate or reissue USDC held in third-party wallets.
• The filing also discloses discussions with the U.S. Department of Justice on a voluntary framework for compensating victims.