New York’s top law enforcement officials have raised serious concerns over the United States’ first comprehensive stablecoin law, warning that it risks protecting crypto companies at the expense of fraud victims while allowing issuers to profit from criminal activity.
In a joint letter sent to senior Democratic lawmakers, New York Attorney General Letitia James and four district attorneys, including Manhattan DA Alvin Bragg, said the GENIUS Act, signed into law in July, creates a regulatory framework for stablecoins but fails to include basic safeguards requiring stolen funds to be returned to victims.
The prosecutors argued that the law confers an “imprimatur of legitimacy” on stablecoins — cryptocurrencies typically pegged to the US dollar — while enabling issuers to sidestep regulatory obligations critical to combating terrorism financing, drug trafficking, money laundering and crypto-enabled fraud.
Stablecoins have rapidly become the backbone of the crypto ecosystem, offering traders a way to park funds without exposure to sharp price swings seen in tokens such as bitcoin and ether. The GENIUS Act introduced reserve requirements, mandating that issuers back stablecoins one-to-one with liquid assets such as cash or short-term US Treasuries, similar to protections used in traditional banking.
However, prosecutors said what the law omits is just as significant as what it includes.
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No obligation to return stolen assets
According to the letter, the absence of provisions compelling issuers to return stolen funds “will embolden stablecoin issuers” and could even provide legal cover when companies choose to retain assets linked to fraud rather than returning them to victims.
The criticism is focused largely on Tether, issuer of USDT, and Circle, which issues USDC. Together, the two firms dominate the global stablecoin market.
Prosecutors said both companies have the technical ability to freeze suspicious transactions but have exercised that power selectively. Tether, they noted, typically freezes assets only on an ad-hoc basis and primarily when working with federal-level authorities. As a result, victims whose funds are converted into USDT often have little chance of recovery.
“The reality for many victims is that funds stolen in or converted to USDT will never be frozen, seized, or returned,” the letter said, adding that issuers currently decide case by case whether to assist law enforcement.
Tether said it takes fraud and misuse of USDT “extremely seriously” and maintains a zero-tolerance policy toward illicit activity. The company said it does not have the same legal obligations as US-regulated financial institutions but voluntarily cooperates with law enforcement agencies at federal, state and local levels.
Circle accused of profiting from frozen funds
Prosecutors were even more critical of Circle, which is publicly listed and headquartered in New York. While Circle presents itself as a partner in combating financial crime, the letter alleged that its policies are “significantly worse for victims” than those of Tether.
Even when Circle freezes funds, prosecutors said, the company does not return them to victims, instead retaining the assets and earning interest on the reserves backing those tokens. This, they argued, creates a clear financial incentive to delay or deny restitution.
Circle said it has consistently prioritised financial integrity and regulatory compliance, adding that the GENIUS Act reinforces obligations to combat illicit activity while strengthening consumer protection standards.
Crime concerns persist despite regulation
Law enforcement officials said stablecoins have become increasingly attractive to criminals due to their price stability combined with transaction anonymity. Research cited by prosecutors shows that stablecoins now account for a majority of illicit crypto transactions.
Despite industry efforts to shed crypto’s association with scams and money laundering, blockchain-based crime continues to grow. Investigators said stolen funds worth billions of dollars have flowed through major crypto platforms in recent years, making swift freezing and restitution critical.
The letter was addressed to Senate Democratic leaders Chuck Schumer, Kirsten Gillibrand — a key supporter of the GENIUS Act — and Mark Warner, who serves on intelligence and banking committees. While Schumer and Gillibrand did not immediately respond, Warner’s office said lawmakers continue to examine whether additional tools are needed to ensure stolen funds can be returned quickly to victims.
Debate over consumer protection
Critics of the GENIUS Act say the controversy highlights a deeper issue: the lack of consumer-first protections in crypto regulation. Legal experts argue that while traditional finance has evolved safeguards through decades of trial and error, similar protections are still missing in the digital asset space.
As Congress considers further crypto legislation, prosecutors warned that without stronger restitution and enforcement provisions, stablecoin regulation risks strengthening the industry while leaving fraud victims behind.
About the author – Rehan Khan is a law student and legal journalist with a keen interest in cybercrime, digital fraud, and emerging technology laws. He writes on the intersection of law, cybersecurity, and online safety, focusing on developments that impact individuals and institutions in India.
