Circle has prevailed in a dispute with Malta-based Heka Funds after a private arbitrator rejected Heka’s $49 million damages claim over being barred from redeeming USDC. Newly public court filings show the case centered on Circle’s suspicion that Heka was using unusually large redemptions to move dollars toward Tether during the 2023 USDC depegging episode.

Dispute tied to 2023 USDC stress

The conflict dates to March 2023, when the collapse of Silicon Valley Bank disrupted part of USDC’s cash reserves and briefly pushed the stablecoin below its $1 peg. In the aftermath, arbitrage firms used Circle’s redemption mechanism to buy discounted USDC on the market and exchange it for dollars, a process that helped bring the token back toward parity.

According to the filings, Heka’s redemption activity was much larger than that of other market participants. Circle argued that the scale and structure of those transactions raised concerns that the fund was not simply engaging in ordinary arbitrage, but was instead channeling dollar liquidity in a way that benefited Tether at USDC’s expense.

Circle’s allegations and Tether link

Circle said it suspected Heka’s redemptions were being used to funnel dollars to Tether. The filings also tied Heka to Tether financially: Tether held an $800 million stake in Heka through a linked vehicle, according to the source report. The same report said Tether had waived standard minting fees for new USDC during that period.

Those details became central to the arbitration. Arbitrator Robert Dondero found that Heka had acted in bad faith by concealing Tether’s backing. On that basis, he upheld Circle’s decision to cut off Heka’s access to USDC redemptions.

No formal manipulation finding

While Circle had cast Heka’s conduct as harmful to USDC, the arbitrator stopped short of making a formal finding of market manipulation. That distinction leaves Circle with a win on the contract and conduct issues without a definitive ruling on the broader allegation.

Heka has rejected the manipulation label. The fund maintains that it did not engage in market manipulation and says Circle’s effort to make the arbitration record public was intended to divert attention from what Heka describes as Circle’s failure to redeem USDC for cash.

Costs awarded, enforcement hearing ahead

In addition to rejecting the damages claim, Dondero ordered Heka to pay Circle roughly $166,000 for legal and expert costs. Circle’s next move is expected to be a hearing aimed at converting the arbitration award into an enforceable judgment in federal court.

The case adds fresh detail to one of the most sensitive periods in USDC’s history, when redemption flows became a critical tool in restoring the token’s peg after the Silicon Valley Bank shock. Even so, the ruling as described in the filings is narrower than Circle’s broader accusations: Heka lost its claim and was found to have concealed Tether’s backing, but the arbitrator did not formally rule that market manipulation occurred.

Source: Cryptopolitan