New York’s top prosecutors have warned that the United States’ new stablecoin law, the GENIUS Act, does not protect victims and could give cover to firms accused of earning money from fraud.
According to a report by CNN, New York Attorney General Letitia James and four district attorneys, including Manhattan District Attorney Alvin Bragg, argue in a letter to senior senators that the Genius Act effectively grants dollar-pegged tokens a stamp of legitimacy while allowing their issuers to bypass key safeguards against terrorism financing, drug trafficking, money laundering, and crypto fraud.
The GENIUS Act, a bipartisan measure signed by President Donald Trump in July, set out reserve rules for stablecoins, requiring issuers to hold highly liquid assets, such as cash or short-term Treasuries, to match their liabilities one-for-one.
Supporters in Washington and the industry promoted the bill as a long-awaited, “clear and simple” framework for a market that had grown largely outside federal rules. Prosecutors, however, focus on the absence of any requirement that issuers cooperate in returning stolen funds.
Prosecutors argue that this omission will encourage firms to keep control of stolen assets, with the letter saying the law may give issuers legal cover when they choose not to help victims recover money lost in stablecoin-related scams.
Tether Accused of Selective Freezing of USDT
The prosecutors point at Tether, the biggest stablecoin issuer, and Circle, the second largest, as examples of how the framework can leave victims stranded.
Tether, the issuer of USDT, has the technical ability to block suspect transactions, the letter says. Prosecutors argue that Tether has used that power only on a limited basis, mostly when working with federal agencies, leaving many victims’ funds neither frozen nor recovered.
According to the letter, Tether decides case by case whether to assist investigations and could stop reissuing frozen tokens entirely if it chose to.
In a response, Tether said it takes fraud, consumer harm, and misuse of USDT “extremely seriously” and follows a zero-tolerance approach toward illicit activity. The company also said it is not under the same blanket obligation as a US-regulated institution to respond to state-level processes, adding that it voluntarily works with federal, state, and local authorities and regularly helps protect victims.
Circle Policies Labeled ‘Worse’ For Victims
Circle, the issuer of the USDC stablecoin, is described in the letter as portraying itself as an ally against financial crime. Prosecutors say its practices are “significantly worse” than Tether’s from a victim’s perspective.
They allege that when Circle freezes funds, it often retains control of the underlying assets and continues to earn interest on them rather than returning them to fraud victims or law enforcement. That structure, they argue, gives the company a strong financial motive to resist requests to release frozen assets.
Dante Disparte, Circle’s chief strategy officer, said the firm has always prioritized financial integrity and the development of US and global standards for stablecoins. He added that the GENIUS Act makes it mandatory for issuers to follow financial integrity rules aimed at combating illicit activity while reinforcing consumer protection norms, and that Circle has complied with existing requirements as a US-regulated financial institution.
Congress Pressed to Tighten Rules
The letter is addressed to Democratic Senators Chuck Schumer, Kirsten Gillibrand, a leading Democratic supporter of the GENIUS Act, and Mark Warner, who serves on the intelligence and banking committees. It is among the strongest criticisms from law enforcement since the law passed, adding to concerns that the framework lacks robust consumer protections and could transmit crypto market stress into the broader financial system.
