Stablecoin issuers face legal test over fund recovery
Wisconsin Prosecutors Charge Circle for Refusing to Seize Frozen Scam USDC
Anonymous
Key Points
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In Wisconsin, Walworth County prosecutors charged Circle with misdemeanor contempt of court for allegedly refusing to assist in seizing about 381,235 USDC; Circle has frozen the stolen funds but argues it cannot burn or reissue tokens, and it has filed a motion to dismiss the complaint on jurisdictional grounds.
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New York prosecutors alleged Circle withheld roughly $119 million in frozen USDC and wrote to the U.S. Senate seeking legislative clarity on issuers’ obligations to comply with asset-recovery orders, noting that reserves continue to earn interest while funds remain locked.
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The case in Wisconsin centers on a May 2025 pig-butchering romance scam in which a Walworth County resident converted life savings into about 381,000 USDC; the tokens were later frozen by court order, with details including a victim referred to as 'Victim #1' and the involvement of a Lenora character in the scheme.
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Prosecutors and observers cite a central feature of the dispute: centralized stablecoin issuers can backdoor burn-and-reissue actions, but Circle contends its on-chain recovery is infeasible given its technical and legal structure; the contrast with Tether’s approach underscores the debate over recovery mechanisms.
Wisconsin prosecutors have charged Circle Internet Financial with misdemeanor contempt of court for refusing to help seize about 381,235 USDC — worth roughly $381,000 — stolen from a local scam victim, according to BeInCrypto. Circle froze the tokens after a court order but says it cannot burn or reissue them to return the funds.
The charges mark the first known criminal complaint against a major stablecoin issuer over asset recovery. New York prosecutors are pressing a separate case involving roughly $119 million in frozen USDC, turning this into a national fight over what crypto companies owe fraud victims, MEXC reported.
Wisconsin Pig-Butchering Scam Triggers Criminal Contempt Charge
The Wisconsin case started with a romance scam. A Walworth County resident — called 'Victim #1' in court documents — was tricked by a character named 'Lenora' into converting their life savings into about 381,000 USDC in May 2025, according to Crypto Briefing. The scammer then moved the funds.
A court issued a warrant ordering Circle to recover the tokens. Circle froze them but stopped there. Prosecutors say Circle could have burned the frozen tokens and reissued them directly to the victim. Circle refused, calling the action technically and legally impossible. Walworth County then filed the misdemeanor contempt charge, BeInCrypto reported.
Circle Says Its Tech Cannot Do What Courts Are Demanding
Circle's defense rests on a technical argument. The company says it cannot perform on-chain recovery — meaning it cannot burn existing tokens and reissue them to a new wallet — given how its infrastructure is built. Circle also filed a motion to dismiss the Wisconsin complaint on jurisdictional grounds, according to Hokanews.
Critics push back hard on that claim. Former FBI agent and financial crime expert Karen Greenway said stablecoin issuers do have the technical ability to recover funds, CryptoNews reported. Tether, Circle's main rival, has cooperated with similar law enforcement requests in the past. That contrast is fueling the argument that Circle is choosing not to help, not that it cannot.
New York Presses for Laws Forcing Issuers to Cooperate
New York prosecutors are dealing with a much larger frozen pile: about $119 million in USDC tied to separate fraud cases. They allege Circle has withheld those funds from victims. Prosecutors wrote directly to the U.S. Senate asking for clear laws spelling out what stablecoin issuers must do when courts order asset recovery, according to MEXC.
New York also raised a sharp financial point. While the frozen USDC sits locked, Circle's reserves keep earning interest. Prosecutors say that means Circle profits from stolen money that victims cannot access. The argument adds a financial motive to the debate over why Circle might drag its feet on compliance.
A Landmark Test for Stablecoin Accountability in Court
Legal observers are watching both cases closely. The core question is simple but high-stakes: can a court force a centralized stablecoin issuer to move funds on-chain? Centralized issuers like Circle control a master key that can freeze tokens. Prosecutors argue that same power should let them reverse a theft.
Prosecutors argue that crypto tools should not protect stolen money from victims. If courts rule against Circle, it could set a binding precedent for how all stablecoin issuers handle fraud recovery going forward. The outcome may ultimately push Congress to write the rules that courts and companies are currently fighting over, Crypto Briefing reported.
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