Circle suspended Heka Funds’ ability to mint and redeem USDC in December 2023 after concluding the Malta-based company might have been involved in trading activity that could benefit Tether, according to arbitration records disclosed in federal court in Boston.
The documents, filed as part of Circle’s petition to confirm a February 2026 arbitration award, reveal a rare legal fight involving two of the world’s largest stablecoin ecosystems. The dispute centered on whether Circle had the contractual right to shut down access for a fund that was redeeming large amounts of discounted USDC at face value during a period of market stress, while also maintaining deep financial ties to Tether.
Retired judge Dondero, who served as arbitrator, ruled largely in Circle’s favor on the key contract issues. He found that Circle acted within its rights under Delaware law when it reduced Heka’s account limits and later suspended its access without prior notice. The ruling said Circle did not need to prove market manipulation had occurred; it needed only a reasonable basis to suspect suspicious activity under the terms of its customer agreement.
The arbitrator also rejected Circle’s request to recover $5.15 million in fees and dismissed broader damages claims. However, he ordered Heka to pay $166,643.25 in expert-related expenses tied to a $49 million profit claim that had already been thrown out.
Heka has denied engaging in market manipulation and said it has not faced regulatory inquiries over such conduct.
Contract terms at the center of the case
The dispute turned on Circle’s master agreement, which allowed the company to adjust limits, pause transactions or suspend account access if it suspected improper activity. Dondero concluded that those provisions gave Circle broad discretion to respond to potential risk, even if the suspected conduct was never proven.
That finding was central to the case. Heka argued that Circle had wrongfully blocked its ability to redeem stablecoins and had interfered with the fund’s trading strategy. Circle argued that it was entitled to protect its platform after detecting unusual activity and learning more about Heka’s connections to Tether.
The court filings show that Circle reduced Heka’s trading limits to zero in November 2023 and fully suspended the account on December 1, 2023. When Heka later sought to redeem $100 million in early 2024, Circle refused the request. The master agreement was terminated soon afterward.
Dondero found no breach of contract by Circle. In the arbitrator’s view, the agreement did not require Circle to wait for definitive proof before acting. A reasonable concern was enough.
How Heka entered Circle’s platform
Heka, managed by Abraxas Capital Management, opened a free Circle account in January 2022 for its Elysium Global Arbitrage Fund. The account gave the fund access to Circle’s minting and redemption infrastructure, allowing it to convert dollars into USDC and redeem USDC back into dollars.
According to the arbitration record, Heka founder Frontini disclosed only one outside capital backer when the relationship began. Dondero later described that disclosure as an intentional omission, based on evidence showing Tether’s growing role in the fund.
The filings said Tether held a rising position in Elysium. That position stood at $500.2 million in April 2023, increased to $504.6 million in May 2023 and reached $800 million by the time of arbitration. At that point, Tether accounted for roughly 75% of the fund’s assets, according to the documents.
During testimony, Frontini said Tether added another $500 million to the fund’s holdings in February 2024. The records also show that he later applied for an account through a French subsidiary without disclosing the ongoing arbitration with Circle.
Those facts were important to Circle’s case because the company argued that it had reason to question whether Heka’s trading activity was independent or supported by a major competitor. Dondero did not find that manipulation had been proven, but he agreed that Circle had enough information to trigger its contractual protections.
The Silicon Valley Bank episode
The trading activity that drew Circle’s attention took place during one of the most volatile moments in USDC’s history.
In March 2023, Silicon Valley Bank collapsed, sparking concerns about Circle’s reserves and causing USDC to trade below its intended $1 peg. The discount created an arbitrage opportunity: traders could buy USDC below $1 in the open market and redeem it through Circle at par, assuming redemption access remained open.
Elysium did exactly that, according to the arbitration filings. The fund bought discounted USDC and redeemed it with Circle at full value. The strategy was not unusual in itself. Stablecoin arbitrage is a common feature of the market, especially during periods when a token temporarily moves away from its peg.
But Circle became concerned because Heka continued the activity after many others had stopped. Internal communications cited in the filings showed disagreement inside Circle over how to interpret the trades. Some employees viewed the transactions as legitimate market activity during a temporary dislocation. Others suspected the trades might have been externally supported and linked to Tether, including through waived fees or other arrangements.
Circle processed $587 million in redemptions for Heka over a two-week period before it began limiting the fund’s activity. The company later moved to restrict and finally suspend access.
The scale of the redemptions, combined with the fund’s Tether exposure, became the foundation for Circle’s position in arbitration. The company argued that it had to protect its network from activity that might undermine confidence in USDC or give a competitor an advantage during a fragile market event.
Dondero’s ruling and the limits of Circle’s win
Circle won the core contractual question, but the ruling was not a complete victory.
Dondero rejected the company’s effort to collect $5.15 million in fees. He also dismissed Circle’s broader claims for damages, meaning the arbitrator did not award the company compensation for alleged harm tied to the disputed trading.
At the same time, Heka failed to convince the arbitrator that Circle had violated the contract by suspending access. Dondero concluded that Circle’s agreement gave it the power to act quickly when it had a reasonable basis for concern.
The award of $166,643.25 against Heka was tied to expert expenses. Dondero ordered that payment after Heka pursued a $49 million profit claim that had already been dismissed.
Circle’s federal court petition seeks confirmation of the arbitration award. The petition is unopposed, according to the disclosed record, making it likely that the ruling will be entered by the court unless procedural issues arise.
A rare look inside stablecoin competition
The documents provide an unusually detailed view of tensions between major stablecoin issuers and the trading funds that operate across their networks.
Stablecoins are designed to maintain a steady value, usually one token for one US dollar. They are widely used by traders to move money across digital asset markets, settle transactions and hold dollar exposure without leaving blockchain-based platforms. Because stablecoins function as a form of digital cash, access to minting and redemption channels is critical.
For funds that trade stablecoin price differences, direct access to issuers can be highly valuable. If a stablecoin trades below $1, direct redemption at par can turn a market discount into profit. If redemptions are slowed, limited or halted, that strategy can break down quickly.
The Heka case shows how much power stablecoin issuers retain through their account agreements. Even though tokens circulate widely across public blockchains, direct redemption is controlled by the issuer. A trading group may hold large amounts of a stablecoin, but the ability to convert that token into dollars can depend on maintaining access to the issuer’s platform.
That structure creates operational risk for traders, especially during periods of market stress. Sudden account restrictions can freeze redemption routes and leave large positions exposed to price changes.
Market growth raises the stakes
The dispute unfolded against the backdrop of a rapidly expanding stablecoin market.
Public market data show the total value of fiat-pegged stablecoins reached about $319 billion in June 2026. The sector’s largest issuer controlled roughly 58% of the market, with a value near $187 billion. Its closest rival held about $75 billion.
Monthly stablecoin trading volume recently reached a record $1.79 trillion, underscoring how central these tokens have become to digital asset markets. That volume reflects the role stablecoins play as settlement tools, trading pairs and dollar substitutes across crypto platforms.
The growth also increases pressure on issuers to monitor flows more closely. Large redemptions, concentrated account activity and links to competitors can become sensitive issues when billions of dollars move through stablecoin systems each day.
The Circle-Heka arbitration record points to that tension. Circle viewed Heka’s activity as a potential threat to its network and market position. Heka maintained that it was conducting legitimate arbitrage and denied any manipulation. Dondero ultimately did not decide that manipulation occurred. Instead, he ruled that Circle’s contract allowed it to act based on suspicion supported by reasonable grounds.
Disclosure failures weighed heavily
One of the most damaging issues for Heka was disclosure.
The arbitrator found that Frontini’s initial account disclosures did not fully reveal the nature of the fund’s backing. The later evidence of Tether’s large and growing position in Elysium made that omission significant.
The attempted French subsidiary account also drew attention. According to the record, Frontini applied for that account without disclosing the ongoing arbitration. Dondero cited the episode as part of the broader context in which Circle assessed risk.
For stablecoin issuers, customer due diligence is not limited to basic identity checks. The source of funds, business relationships and trading purpose can all matter, particularly when a customer is moving hundreds of millions of dollars through redemption channels.
The ruling suggests that incomplete disclosure can give an issuer additional support for restricting access, especially when the account agreement gives the issuer broad discretion.
What the ruling means for traders
The decision does not create a public court precedent in the same way a full judicial opinion would, because it came from arbitration. Even so, it is likely to be studied closely by trading firms, stablecoin issuers and lawyers working with digital asset businesses.
The message is straightforward: direct access to a stablecoin issuer is a contractual relationship, not an unconditional right. If the agreement allows an issuer to suspend activity based on suspected risk, traders may have limited recourse unless they can show the issuer acted outside the agreement or in bad faith.
The ruling also highlights the importance of transparency. Funds that rely on issuer accounts may face serious consequences if they fail to disclose major capital relationships, especially ties to competitors or entities that could create perceived conflicts.
For issuers, the case reinforces the value of carefully drafted account terms. Circle prevailed on the central contract issue because the arbitrator found that its agreement allowed account limits to be changed or access suspended without notice when suspicious activity was suspected.
For traders, the case is a reminder that stablecoin arbitrage can depend as much on legal access as on market pricing. A discount may appear profitable, but the trade only works if redemption channels remain open.
A dispute shaped by market power
The arbitration record describes about $1.3 billion in overlapping financial exposure over a two-year period, including Heka’s large redemptions through Circle and Tether’s substantial position in the Elysium fund.
That overlap placed Heka between two dominant stablecoin networks at a time when competition for digital dollar flows was intensifying. Circle’s concern was not merely that Heka had profited from USDC’s temporary discount. It was that the trading could have been influenced by a rival with a major stake in the fund.
Heka rejected that characterization. It said it did not manipulate markets and had not been questioned by regulators over such behavior.
Dondero’s ruling stopped short of finding wrongdoing by Heka on manipulation. But it confirmed that Circle did not need to prove the most serious allegation to justify suspending the account. Under the agreement, suspicion supported by reasonable facts was enough.
The case now moves through federal court as Circle seeks confirmation of the award. If confirmed, the arbitration outcome will close a major chapter in one of the most detailed public disputes yet involving stablecoin issuers, redemption rights and the competitive pressures reshaping the digital cash market.
For deeper context on assets like USDC and Tether, explore why stablecoins matter in today’s markets and their growing systemic role.
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