Why Did Circle Suspend Heka’s USDC Services?
Circle suspended Heka Funds’ minting and redemption services in December 2023 after concluding that the Malta-based arbitrage fund may have been manipulating the market to benefit Tether, Circle’s largest stablecoin rival, according to arbitration documents filed publicly in Boston federal court.
The dispute centered on Heka’s Elysium Global Arbitrage Fund, managed by London-based Abraxas Capital Management. Heka opened a free Circle account in January 2022, but Circle later determined that Tether was the fund’s dominant financial backer. Arbitration testimony showed Tether had invested $800 million in Elysium by the time of the proceedings, representing roughly 75% of the fund’s assets.
The filings also revealed that Tether had waived USDT minting fees for Heka. That detail mattered to Circle because it suggested Heka’s trading economics may have been shaped by a special relationship with Circle’s main competitor, rather than only by market pricing.
Retired judge Robert L. Dondero, the arbitrator, sided with Circle on the remaining contract claims. The ruling did not require Circle to prove that manipulation had occurred. It only needed to show that it had reached a reasonable conclusion that manipulation might be taking place.
What Did Circle Say Heka Failed To Disclose?
Circle argued that Heka did not disclose Tether’s role when the account was opened. Heka founder Fabio Frontini disclosed a single investor, Simon Grima, rather than the fund’s actual capital providers. Dondero concluded that the omission was deliberate.
“To this Arbitrator, this omission was intended to avoid the disclosure of Tether’s role in Elysium,” Dondero wrote in the final award.
Circle Chief Business Officer Kash Razzaghi testified that the company would not have opened the account had it known in January 2022 about the Tether connection. That point became central to Circle’s defense because the dispute was not only about a trading strategy. It was also about counterparty risk, disclosure, and whether a stablecoin issuer can restrict services when a customer’s backers create competitive or market integrity concerns.
The case shows how stablecoin issuers are being forced to manage risks that look more like banking, market surveillance, and strategic counterparty review than simple token operations. Minting and redemption access can determine whether arbitrage trades remain profitable, especially during periods when a stablecoin trades away from its peg.
Investor Takeaway
The case highlights a key stablecoin market risk: redemption access is not only operational. It can become a control point in disputes over market behavior, counterparty disclosure, and competition between major issuers.
How Did The USDC Arbitrage Become Disputed?
The dispute traces back to March 2023, when Silicon Valley Bank’s collapse pushed USDC below its dollar peg. Heka bought discounted USDC in secondary markets and redeemed it with Circle at par. That was the same arbitrage other funds pursued during the depeg. The issue, according to the filings, was that other traders stopped as the spread tightened, while Heka continued.
Circle’s own staff were initially divided. Razzaghi told colleagues in May 2023 that the trade was “a manufactured arb not a market-driven one,” linking it to Tether’s waived fees. Another Circle employee, David Norton, pushed back, saying Frontini’s trades made rational sense and that cutting Heka off would only move the arbitrage to another market participant.
Circle allowed Heka to redeem more than $587 million in USDC over a two-week period while it tested Frontini’s view that the spread would widen without him. In May 2023, Norton asked Heka to pause. The spread tightened instead, and Norton described the result as “a pretty material data point.”
The filings also showed that Coinbase became uncomfortable dealing with Heka because of the fund’s Tether ties and unique fee structure, and placed its own restrictions on the account. That added weight to Circle’s concerns that the issue was not limited to one issuer’s internal interpretation.
What Did The Contracts Allow Circle To Do?
Circle cut Heka’s minting and redemption limits to zero in November 2023. Frontini responded with a letter threatening legal action and a regulatory complaint. Circle then suspended the account on Dec. 1, 2023, citing Section 9(c) of the parties’ master services agreement.
Heka’s February 2024 request to redeem $100 million was denied. The master services agreement lapsed the following month. Tether invested another $500 million in Elysium during that same February, according to Frontini’s testimony. Heka filed its arbitration demand roughly a month later.
Dondero found no breach. Delaware law governed the contracts, and the user agreement gave Circle the right to change limits “as we deem necessary” and to suspend services “without notice and without liability.” Frontini also conceded that the user agreement remained in full force after he signed the master services agreement.
The arbitrator declined to award Circle the full $5.15 million in fees and costs it sought. He awarded $166,643.25 tied to expert work after Heka continued pursuing $49 million in lost profits for a period that had already been foreclosed by an April 2025 ruling.
Investor Takeaway
Stablecoin arbitrage depends on confidence that redemption windows will stay open. This dispute shows that issuers can use contractual rights to close or restrict those windows when they believe trading behavior or customer disclosures create unacceptable risk.
Why Does This Matter For Stablecoin Markets?
The Circle-Heka dispute puts a rare spotlight on the private mechanics behind stablecoin liquidity. Public markets often treat USDC and USDT as simple dollar tokens, but large arbitrage funds, issuer relationships, fee arrangements, and redemption access can shape how those tokens behave under stress.
For investors, the case raises 2 main questions. The first is whether stablecoin issuers have enough visibility into who is behind large redemption accounts. The second is whether special fee arrangements between trading firms and rival issuers can distort arbitrage incentives during market dislocations.
A Heka spokesperson told the Financial Times that the fund never engaged in market manipulation and has never been the subject of any regulatory investigation or proceeding involving manipulation or similar misconduct. The spokesperson also characterized Circle’s push to publish the arbitration record as an attempt to distract from the company’s refusal to honor USDC redemptions.
Heka later dropped its opposition to public filing, and Circle’s petition to confirm the arbitration award is now unopposed. The legal dispute may be nearing closure, but the market issue remains open: stablecoin redemption infrastructure is becoming more important, more competitive, and more exposed to conflicts between issuers and large trading counterparties.
