Sending one million USDC to an empty wallet by mistake, sues in court to demand compensation from Circle.

Pharmaceutical company CelaCare has filed a lawsuit against the stablecoin issuer Circle, demanding the return of 1 million USDC mistakenly sent to the wrong address due to an input error. Why should Circle be liable for the mistake made by the user? Would this be possible in the traditional financial world? And can Circle actually freeze the related wallet containing the USDC and return the funds to the customer?

Why is CelaCare suing Circle?

According to court documents, CelaCare's CEO Kenneth Yates intended to send 1 million USDC to a wallet address on the Ethereum blockchain for a collaborative partner but mistakenly input the letter B as the number 8 in the address, resulting in the funds not reaching the intended destination.

CelaCare believes that the issuer of USDC, Circle, is obligated to compensate for their loss. However, Circle refused, leading CelaCare to file a lawsuit against them.

Why should Circle compensate for an input error?

From the documents, it is clear that CelaCare admits to inputting the wrong wallet address, causing the funds not to reach the intended partner. But why would they demand compensation from Circle for their own mistake?

USDC issued by Circle is centralized. CelaCare, using Coinbase's account (where Coinbase is also a shareholder of Circle), collaborates with Circle to operate the circulation and issuance of USDC. Circle transfers the corresponding amount of USD into the appropriate account, and then issues USDC on the Ethereum blockchain, promising to assist in converting it back to USD when requested by the holder.

CelaCare claims that the erroneous address they sent to had never been used for any transactions, and the 1 million USDC they sent was the only asset in that address. CelaCare's lawyer also sent a message to that address but received no response even after a month, leading CelaCare to believe that no one owns that address.

CelaCare argues that when Circle created USDC, they granted themselves the authority to implement "access denial," allowing Circle to blacklist any Ethereum wallet address from using USDC for transactions. Therefore, CelaCare believes that Circle should freeze the funds or blacklist that address and issue a new fund to return to CelaCare.

Can you demand a bank to compensate for a transfer error?

I also consulted several banking professionals about whether a customer can demand compensation if they input or fill in the wrong bank account, resulting in funds going to the wrong account. The unanimous response was, "How is that possible"?

However, since opening a bank account involves Know Your Customer (KYC) procedures, each account has a rightful owner. The bank can assist in locating the account holder, but whether they return the funds is not the bank's responsibility. Ultimately, legal action may be the only recourse, but the defendant would not be the bank.

Another difference is that fiat currency is not issued by banks, and banks do not have the authority to destroy or freeze a customer's assets.

However, Circle might be different. As USDC is issued by Circle, they have the ability to freeze USDC.

Circle's ability to freeze USDC

Circle has the capability to freeze USDC tokens on-chain. USDC is a centralized stablecoin issued by Circle. The smart contract managing USDC includes functions that allow the issuer to freeze and unfreeze tokens held at specific blockchain addresses. This feature is designed to comply with regulatory requirements such as sanction enforcement and anti-money laundering regulations.

Previous cases include:

• July 2020: Circle and Coinbase froze approximately $100,000 USDC related to a suspected security incident involving an Ethereum DeFi protocol.

• August 2022: Following sanctions by the U.S. Treasury Department on Tornado Cash, Circle froze USDC tokens in addresses associated with the sanctioned entity.

Circle's operational features include:

• Freeze Functionality: The USDC smart contract contains a feature that allows Circle to block the transfer of USDC tokens from specific addresses. When an address is frozen, the tokens within that address cannot be transferred until the freeze is lifted.

• Compliance Measures: These enable Circle to comply with legal and regulatory obligations, such as responding to court orders or government sanctions.

Circle's ability to freeze USDC on-chain is a deliberate design to ensure regulatory compliance. Users should understand that unlike decentralized cryptocurrencies like Bitcoin or Ethereum, centralized stablecoins like USDC may be subject to management controls. Therefore, whether CelaCare's claim is reasonable or not may still be subject to further discussion in the court.