New York prosecutors are voicing serious concerns regarding the GENIUS Act, a recently enacted piece of crypto legislation, claiming it could inadvertently shield fraudulent activities within the stablecoin market. In a letter obtained by CNN, New York Attorney General Letitia James, along with four district attorneys, including Manhattan's Alvin Bragg, have criticized the act for potentially granting legitimacy to stablecoins while simultaneously allowing issuers to bypass crucial regulations designed to combat financial crimes. These regulations are in place to prevent money laundering, terrorism financing, and crypto-related fraud.
The GENIUS Act, which took effect in July of last year, establishes new rules for stablecoin issuers, requiring them to maintain reserves similar to those held by banks. This means that each stablecoin must be backed one-to-one with liquid assets like U.S. dollars or short-term government securities. The intention behind the law is to bring oversight to a rapidly growing, yet largely unregulated, market.
Despite these measures, prosecutors argue that the law falls short by not mandating that companies return stolen assets to fraud victims. This omission, they warn, could encourage stablecoin issuers to retain stolen funds rather than assist in their recovery. The letter specifically names Tether (USDT) and Circle (USDC), the two largest stablecoin providers, accusing them of insufficient cooperation in freezing involved funds and assisting in their return. Prosecutors suggest that these companies may even profit from investments of frozen or stolen funds.
Tether, which leads the market in stablecoin issuance, possesses the technical capability to freeze suspicious USDT transactions. However, prosecutors note that Tether only does so selectively and typically in cooperation with federal authorities. The letter highlights the lack of consistent support for law enforcement from stablecoin issuers, stating that "For many victims, funds lost or converted into USDT are unlikely to ever be frozen or returned". In response, Tether told CNN that it treats fraud and misuse of USDT with the utmost seriousness and enforces a strict zero-tolerance policy for illegal activity. Following the signing of the GENIUS Act in July 2025, Tether announced plans to expand operations in the United States.
Circle, the second-largest stablecoin issuer, claims to support efforts against financial fraud. However, prosecutors argue that Circle's policies are even less favorable to victims than Tether's. They allege that when Circle does freeze assets, it retains control of the funds and continues to earn interest, rather than returning them to those affected by fraud. This, according to prosecutors, creates a strong financial motive for Circle to resist requests from law enforcement, as the company profits from holding the underlying assets. Circle's chief strategy officer, Dante Disparte, stated that the company is committed to financial integrity and compliance with both U.S. and international regulations and that the GENIUS Act clarifies the need for stablecoin issuers to follow rules designed to prevent illicit activity and protect consumers.
The concerns raised by New York prosecutors highlight a persistent issue in the crypto industry: the absence of basic consumer protections. Hilary J. Allen, a law professor specializing in banking and cryptocurrency, noted that traditional finance has established safeguards over decades, but these are missing from the new law.
The letter from the New York prosecutors was sent to Democratic Senators Chuck Schumer, Kirsten Gillibrand, and Mark Warner. While Schumer and Gillibrand did not immediately comment, a spokesperson for Warner stressed that stablecoin issuers must comply with court orders and cooperate with law enforcement to help victims recover stolen assets. Warner's office added that Congress is considering whether further legislation is needed to ensure prompt action against criminal activity and to return stolen funds.