How Circle Blocked a Tether-Backed Fund During SVB Collapse
Recently unsealed arbitration records provide new details about Circle's decision to cut off a major USDC customer during the 2023 Silicon Valley Bank crisis.
Summary:
- The documents outline why Circle suspended Heka Funds’ access to USDC redemptions during the banking turmoil.
- The arbitrator concluded that Heka concealed its relationship with Tether during its dealings with Circle.
- Heka’s $49 million damages claim was rejected, with Circle prevailing in arbitration.
- The disclosures provide a rare look into how major stablecoin issuers managed liquidity pressures during the Silicon Valley Bank crisis.
Recently disclosed court filings, first reported by the Financial Times, provide new details about Circle’s decision to suspend crypto investment firm Heka Funds from redeeming USDC during the Silicon Valley Bank crisis in 2023.
The documents were filed as part of Circle’s effort to have a private arbitration award confirmed in federal court in Boston. Although the arbitration concluded in February 2026, the filings have only recently become public, revealing additional information about Heka’s relationship with Tether and the factors that led Circle to terminate the fund’s redemption access.
This is careful, attributes the reporting appropriately, and avoids claiming the filings are “the clearest account yet” unless you’re making that editorial judgment yourself. It also flows naturally into the section explaining Heka’s ties to Tether.
Circle Questioned Heka’s Relationship With Tether
According to the information, Circle became concerned after observing unusually large USDC redemption requests from Heka during the banking crisis that temporarily pushed USDC below its dollar peg.
Circle argued that the redeemed dollars were ultimately benefiting Tether, whose flagship stablecoin USDT was competing directly with USDC during one of the most volatile periods in the stablecoin market.
The court documents state that Tether had invested approximately $800 million in Heka, representing roughly 75% of the fund’s assets. The filings also indicate that Tether waived minting fees for Heka, a relationship Circle argued effectively aligned the fund’s trading activity with Tether’s commercial interests.
Based on those concerns, Circle suspended Heka’s ability to redeem USDC through its platform.
Arbitrator Sides With Circle
The arbitration ultimately focused on whether Circle acted within its contractual rights when it terminated Heka’s access.
Retired judge Robert Dondero, who served as arbitrator, concluded that Heka had failed to disclose the extent of its relationship with Tether despite knowing the information would likely have influenced Circle’s assessment.
According to the decision, Heka understood that revealing the relationship would have triggered what the arbitrator described as “bells and whistles of concern” inside Circle.
READ MORE: Elizabeth Warren Presses Senate Over CLARITY Act
The ruling dismissed Heka’s claim for approximately $49 million in lost profits and ordered the fund to reimburse Circle roughly $166,000 in legal and expert costs.
Heka continues to deny wrongdoing and maintains that it has never been investigated by regulators for market manipulation.
The Dispute Traces Back to the SVB Crisis
The disagreement emerged during one of the most challenging periods in USDC’s history.
When Silicon Valley Bank entered receivership in March 2023, uncertainty surrounding part of Circle’s reserve deposits caused USDC to temporarily lose its one-dollar peg.
During that period, Heka purchased discounted USDC and redeemed large volumes directly with Circle for dollars.
Circle later argued that this liquidity ultimately flowed toward Tether, allowing USDT to expand its market position while its primary competitor was managing one of the largest confidence shocks in the stablecoin market.
The arbitrator did not rule on broader allegations of market manipulation but instead focused on the contractual relationship between Circle and Heka and whether the fund had acted in good faith.
Rare Insight Into Stablecoin Competition
The filings offer an unusually detailed look at how competition between the industry’s two largest stablecoin issuers extended beyond public market share figures during periods of financial stress.
Unlike most disputes between major crypto firms, the case exposes how redemption infrastructure, institutional liquidity and strategic investment relationships became central issues as billions of dollars moved between stablecoins during the banking crisis.
Circle and Tether have largely declined to comment beyond the court filings themselves. However, the documents illustrate how maintaining investor confidence during periods of market instability can be as strategically important as expanding circulation, particularly for issuers whose business models depend on large institutional redemption activity.
The information presented in this article is intended for informational purposes only and should not be interpreted as financial, investment, or trading advice. Coinspress.com does not promote or advocate for any particular investment strategy, asset, or cryptocurrency project. Cryptocurrency markets are highly volatile and unpredictable – always perform your own research and seek guidance from a qualified financial professional before making any investment decisions.
Alexander Stefanov
Reporter at CoinsPress
Alex is Editor-in-Chief of Coinspress and co-founder of Millennial Media Group, with nearly a decade of experience covering financial markets - crypto first, then everything else. It started in 2016 with Bitcoin. Like most people at the time, he didn't fully understand it - so he kept digging. Blockchain, tokenomics, the projects, the cycles. That curiosity never stopped, and eventually pulled him into traditional markets too: equities, commodities, macro. Not because he left crypto behind, but because you can't properly understand one without the other. What drives him is straightforward: he wants to know why something is happening, not just that it's happening. Most market coverage stops at the headline - price up, price down, here's a chart. Alex finds that kind of reporting actively unhelpful. If you walk away from an article without understanding the mechanism behind the move, what did you actually learn? He holds a degree in Tourism from New Bulgarian University - not the most obvious path into financial markets, but markets have a way of pulling in people who are simply too curious to stay out. He has authored over 200 in-depth analyses and more than 10,000 articles across crypto and traditional finance. He still thinks every day in markets teaches him something new. That's probably why he hasn't stopped.
