Circle banned Heka Funds from its platform due to suspected market manipulation in favor of Tether, with concerns over large-volume redemptions and concealed investments.
Arbitrator Robert Dondero upheld Circle’s decision, citing Heka’s bad faith in concealing Tether’s $800 million stake, but stopped short of finding market manipulation.
The dispute highlights the intense rivalry between Circle and Tether, with control over redemption flows and peg stability at the center of their stablecoin businesses.
Circle banned a Tether-backed investment fund from its platform in late 2023 over concerns that the fund was trading to benefit its biggest rival, according to arbitration documents made public in a Boston federal court on Tuesday.
The Ban and the Arbitration
According to the Financial Times report, Heka Funds, a Malta-based crypto investment vehicle managed by London’s Abraxas Capital Management, was suspended by Circle after the USDC issuer came to suspect the fund was manipulating the market in Tether’s favor.
The fund took Circle to arbitration in 2024, claiming the ban had cost it $49 million in lost profit. The arbitrator, retired judge Robert Dondero, sided with Circle, dismissed the claim, and awarded the company roughly $166,000 in attorneys’ fees and expert costs.
Arbitration proceedings are private, but Circle pushed for the documents to be filed publicly as part of a motion in Boston federal court to confirm the decision. The result is a rare public window into the rivalry between the two largest issuers in a stablecoin market now worth more than $310 billion.
What Sparked Circle’s Suspicion
The dispute traces back to the March 2023 collapse of Silicon Valley Bank, which held a portion of the cash reserve backing USDC. As the bank faltered, USDC briefly slipped below its $1 peg.
Heka, like other arbitrage funds, began buying USDC below $1 and redeeming it with Circle for cash—a process that ordinarily helps a stablecoin recover its peg during stress. Circle grew concerned, according to the filing, when it noticed Heka was redeeming in far larger volumes than other market participants.
The company came to believe Heka was funneling the proceeds back to Tether, helping its rival grow at Circle’s expense, and that the fund kept redeeming even after other traders saw no remaining profit in doing so.
The $800 Million Stake Circle Didn’t Know About
The relationship deteriorated into what the documents describe as “hostilities” when Circle learned that Tether had backed Heka with an $800 million investment — roughly 75% of the fund’s total assets — made through a linked fund. Tether had also waived the fees it charged the fund for minting new tokens.
According to the arbitrator, Heka concealed Tether’s involvement and knew that disclosing it would trigger, in the filing’s words, “bells and whistles of concern” from Circle. Soon after learning of the stake, Circle placed restrictions on Heka’s account and, following threats of legal action from the fund, suspended it in December 2023.
What the Arbitrator Actually Found
The precise findings matter. Dondero wrote that Circle “became appropriately concerned that Heka arbitrage was structured and possibly encouraged by Tether so that US dollars could be moved to Tether from Circle in exchange for USDC.”
That language stops short of a finding that Heka manipulated the market. The arbitrator upheld Circle’s decision to ban the fund and concluded that Heka had acted in bad faith — specifically in concealing Tether’s backing — rather than issuing a ruling that manipulation had occurred. The distinction is central to how the dispute has been characterized by both sides.
Heka’s Denial and Counter-Claim
Heka rejects the manipulation framing outright. A spokesperson for the fund said it “never engaged in market manipulation and has never been the subject of any regulatory investigation or proceeding involving market manipulation or similar misconduct.”
The fund also turned the dispute back on Circle. It said Circle’s effort to publish the confidential arbitration material was “a transparent attempt to distract others from the real issue: its refusal to honor its promise to redeem USDC for cash.”
Why the Redemption Charge Lands
Heka’s counter-allegation is not an isolated grievance. Days earlier, TCT reported that Circle faced a criminal complaint from US law enforcement accusing it of refusing to return frozen USDC to scam victims, with critics noting the company continues to earn yield on the reserves backing tokens it declines to redeem or reissue.
That two separate parties — a litigating arbitrage fund and law enforcement — have raised concerns about Circle’s redemption conduct within the same week sharpens what would otherwise be a one-sided narrative. Circle has consistently positioned itself as the compliance-first, rule-of-law stablecoin issuer, a posture that its handling of redemptions is now testing on more than one front.
A New Front in the Stablecoin War
The filings land at a competitive moment for Circle. The company is defending USDC’s roughly 24% market share against Tether’s dominant USDT and, more recently, against Open USD, a bank- and payments-backed rival whose June launch knocked Circle’s stock sharply lower.
The Heka case exposes how far the rivalry between the two incumbents extends beneath the surface. Stablecoin issuers have become major buyers of assets such as US Treasuries, and control over redemption flows and peg stability sits at the center of their business. What the Boston filings show is that the competition for that control now runs through private trading accounts and, increasingly, the courts.
Also Read: Wall Street Cuts Circle (CRCL) to $50: The Open USD Stablecoin Threat
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