Wisconsin prosecutors have escalated their legal battle with Circle by filing a criminal contempt complaint against the stablecoin issuer for refusing to comply with a court order to recover stolen USDC tokens. The dispute centers on a Walworth County resident who lost 381,000 USDC tokens in a Telegram pig-butchering scam after transferring funds into a self-custodial Ethereum wallet controlled by an alleged scammer. Following a court warrant in August 2025, Circle blocklisted the wallet, preventing the stolen USDC from being transferred or redeemed. However, when prosecutors later sought a second order directing Circle to either 'burn and reissue' the frozen tokens into a wallet controlled by the sheriff's office or compensate the victim with $381,235 in cash, Circle declined to comply, citing technical limitations. According to the International Consortium of Investigative Journalists (ICIJ), prosecutors claimed that Circle intentionally disobeyed, resisted, or obstructed the authority, process, or order of the court regarding the warrant asking it to 'burn and reissue' the victims' stolen funds. The latest development includes one misdemeanor count in the criminal complaint filed against the company.
The dispute has intensified as Circle argues that the criminal contempt charges stem from technical limitations rather than refusal to cooperate. According to court filings, Circle maintains it does not control the private keys of externally owned wallets and therefore cannot unilaterally destroy, transfer, or reissue USDC held by third parties. While Circle can freeze tokens through its blocklist mechanism, the company says this capability does not extend to rewriting ownership on a public blockchain. Circle also contends that issuing replacement USDC or paying cash while the original tokens remain frozen on-chain could force the company to back the same assets twice, creating problems for the stablecoin's one-to-one reserve model. The company has asked the court to dismiss the complaint, arguing that Wisconsin lacks jurisdiction over both the company and the disputed assets, while also working with the U.S. Department of Justice to establish a federal framework for victim compensation through formal asset forfeiture proceedings. However, crypto tracing firm Cryptoforensic Investigators told the ICIJ that all Circle has to do is update its code to achieve the 'burn and reissue' process it claimed it couldn't do. The ICIJ notes that in court filing footnotes, Circle had essentially approved the permanent freezing of tokens and the reissuance of new USDC to victims, which achieves the 'burn and reissue' process it said it couldn't do.
The latest filing 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 that could provide a path forward for resolving similar disputes. Under the agreement, Circle could voluntarily issue replacement USDC following a final forfeiture order and a permanent blocklisting order. This framework addresses the technical limitations that have prevented the company from directly reissuing tokens held in third-party wallets. The filing also reveals that Circle has been working with the U.S. Department of Justice to establish a federal framework for victim compensation through formal asset forfeiture proceedings, which could provide a more structured approach to handling stolen cryptocurrency cases.
The stark difference between Circle and Tether's approaches has become evident through recent data. According to AMLBot data, Tether froze approximately $3.3 billion in USDT across more than 7,200 wallets between 2023 and 2025, while Circle froze only about $109 million in USDC over the same period, representing a 30-fold difference by value. Tether can destroy frozen tokens and issue clean replacements to law enforcement or victims through its burn and reissue process, having already reissued around $1.1 billion and frozen $4.7 billion linked to illicit activity. Circle does not currently offer the same public process for third-party wallets, though court filings show discussions with federal prosecutors about similar arrangements. The case could become one of the most closely watched legal tests of where judicial authority ends and blockchain code begins.
The policy differences have drawn criticism from law enforcement officials as stablecoin transactions can move across wallets within seconds, often much faster than investigators can obtain court orders. Milwaukee County detective Scott Simons told ICIJ he has worked on more than a dozen cases where Circle either declined early freeze requests or where court orders came too late. Investigators argue that since stablecoin transfers settle within seconds, valuable time is often lost before legal paperwork is complete. New York prosecutors have written to Congress highlighting Circle's inability to tackle stolen crypto funds, claiming 'Circle has refused to cooperate with law enforcement or freeze assets unless compelled to do so by legal process, refused to comply with validly issued state search warrants, and refused to return stolen funds to victims, even when compelled by court order.' The letter stated that for Circle, '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.' The ICIJ highlights blockchain researcher Yury Serov's claim that 119 million USDC tokens remain frozen, while independent blockchain sleuths have criticized Circle for its slow response in 2025 after DeFi platform GMX was hacked for $42 million, with tens of millions of USDC swapped into the DAI stablecoin which cannot be frozen.
