Circle Dispute With Tether-Backed Fund Comes Into Focus

• The arbitration centered on Circle’s decision to suspend Heka Funds’ access to USDC redemptions during the Silicon Valley Bank turmoil.
• The arbitrator found that Heka failed to disclose the extent of its financial relationship with Tether.
• Heka’s $49 million damages claim was rejected, while Circle was awarded legal and expert costs.
• The case highlights the importance of transparency and counterparty risk in institutional stablecoin markets.

According to the Financial Times, court filings made public this week shed new light on the private arbitration between Circle and Heka Funds, detailing the events that led the USDC issuer to suspend the fund’s redemption privileges during the 2023 Silicon Valley Bank turmoil. The filings form part of Circle’s effort to have an arbitration award confirmed after proceedings concluded in February 2026. While the outcome was already known, the supporting documents disclose previously confidential evidence presented during the case. Circle Raised Concerns Over Heka’s Trading Activity As of the information, Circle became concerned after Heka redeemed unusually large volumes of USDC while the stablecoin temporarily traded below its dollar peg following the collapse of Silicon Valley Bank. The company argued that the redemptions were not simply an arbitrage strategy. Instead, it alleged the proceeds were being directed toward Tether, strengthening USDT at a time when confidence in USDC had weakened. A central issue in the arbitration was Heka’s relationship with Tether. Evidence presented during the proceedings showed:

• Tether invested approximately $800 million in Heka, representing about 75% of the fund’s assets.
• Tether waived certain USDT minting fees for the fund.
• Circle argued those arrangements should have been disclosed when Heka established its redemption relationship with the company.

The USDC issuer maintained that knowledge of Heka’s relationship with Tether would have changed its risk assessment when evaluating the redemption relationship. Arbitrator Found Heka Acted in Bad Faith Retired judge Robert Dondero, who presided over the arbitration, ruled in Circle’s favor. According to the decision, Heka intentionally failed to disclose its relationship with Tether despite recognizing that doing so would likely have raised what the arbitrator described as “bells and whistles of concern” within Circle. 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 fees. Heka has denied engaging in market manipulation and maintains it has never been the subject of any regulatory investigation. The firm has also argued that Circle’s efforts to make the arbitration filings public are intended to shift attention away from questions surrounding USDC’s handling during the SVB crisis. The Case Extends Beyond a Contract Dispute While the arbitration focused on contractual obligations rather than allegations of market manipulation, the newly disclosed records provide a rare glimpse into how stablecoin issuers monitored institutional counterparties during one of the sector’s most volatile periods. The proceedings also illustrate how redemption relationships have become an important risk-management tool for stablecoin issuers. Beyond maintaining reserves, firms increasingly scrutinize who is accessing liquidity and how redeemed funds may affect broader market dynamics. As the stablecoin market continues to attract greater institutional participation and regulatory oversight, the dispute underscores that transparency, governance and counterparty disclosure are becoming as important as liquidity and market share in competition between major issue