Circle Faces Allegations Over Unchecked North Korean-Linked USDC Transactions

Stablecoin issuer Circle is facing scrutiny after prominent blockchain investigator ZachXBT accused the company of allowing sanctioned North Korean actors to move millions through its USDC network. The allegations surface just as Circle is seeking a U.S banking charter

The allegations made by ZachXBT raise wider questions about the susceptibility of abuse of crypto by state-sponsored hacking groups. While the U.S is pushing for the GENIUS Act, a bill to help regulate stablecoins, the development may have an impact on how regulators approach oversight of stablecoins in the future

North Korea’s Alleged Exploitation of USDC

According to a post on X, ZachXBT is alleging that North Korea-based IT workers have been using Circle’s USDC stablecoin to move “high eight figures” in recent weeks. These funds are reportedly tied to addresses linked to the Lazarus Group, a notorious state-sponsored hacking collective. If validated, the transactions may imply that North Korea is still exploiting crypto infrastructure vulnerabilities to evade international sanctions.

The blockchain investigator also accuses Circle of not preventing or reporting such transactions. ZachXBT claims that the allegations around Circle are part of growing “crime super cycle,” whereby illegal crypto activity goes unpunished because of negligence in oversight or ineffectiveness in enforcement. The statements directly undermine the credibility of Circle and the effectiveness of its compliance system.

Circle, according to ZachXBT, has made no apparent effort to freeze the wallets in question. Such passivity, according to the blockchain investigator, goes contrary to the claims that the USDC issuer makes use of advanced mechanisms to track and prevent criminal activities on the platform

Circle’s Compliance Claims Under Pressure

In its regulatory filings and public statements, Circle claims to intensively use anti-money laundering (AML) know-your-customer (KYC) checks. The company also works with law enforcement agencies and financial watchdogs to counter any abuse of its systems, as per its policy hub section. Nevertheless, the allegations by ZachXBT refute the effectiveness of these measures.

However, Circle has not made any statement over the allegations. The firm’s overall track record in terms of compliance could be potentially damaged by this event. In case regulators determine that sanctioned parties have knowingly or carelessly utilized USDC, Circle might experience a regulatory backlash. This would be very devastating considering that the firm is currently pursuing a U.S. national trust bank license.

The wider stablecoin ecosystem is also at risk of backlash if law enforcers validate the allegations. Other issuers are now likely to be under pressure to beef up their own compliance tools. The allegations may draw other entities such as crypto exchanges, wallet providers, and custodians that may have supported any of the marked transactions unknowingly, into the regulatory reaction

ZachXBT Claims Stir Stablecoin Market Debate and Repercussions

The allegations around Circle have also stirred discussions around stablecoin competition. One XRP advocate (@metzyxrp) pointed out Ripple’s RLUSD as a safer alternative. However, ZachXBT slammed the idea, claiming that he has more confidence in Circle, Paxos, and Tether as opposed to Ripple. The crypto investigator alleges that Ripple has had significant adoption influenced by paid partnerships more than natural utility, implying that credibility in a project cannot be found exclusively on business deals.

“I trust Circle, Paxos, or Tether infinitely more than Ripple…They all at least have organic users whereas Ripple does not and theirs comes from misrepresenting paid partnerships to make it appear like adoption,” ZachXBT wrote

In the markets, the stock of Circle (NYSE: CRCL) has dipped by 31% over the last week, as per Yahoo Finance. The dip mirrors investor worry about rising competition in the stablecoin market

Circle’s Stock (CRCL) Performance | Source: Yahoo FinanceShould the regulators take steps based on the claims by ZachXBT, this might have a negative impact on the perceived security and usefulness of USDC. A legal crackdown on Circle would be a huge blow for the USDC stablecoin which is trying to compete with the likes of Tether’s USDT. At the moment, USDC is still lagging behind USDT which has a 62.54% market dominance, as per data by DefiLlama

However, an effective application for the U.S national trust bank license would subject Circle to federal regulation, which could drive the confidence of traditional finance market players. This would also offer a more intrinsic legal basis to utilize USDC in payments and custody services