New York State's highest-ranking prosecutors have publicly criticized the GENIUS Act, legislation designed to regulate stablecoins, claiming that it insufficiently safeguards victims of financial fraud and inadvertently shields companies that benefit from illicit activities. In a letter exclusively obtained by CNN, New York Attorney General Letitia James and four district attorneys, notably including Manhattan's Alvin Bragg, articulated their strong objections to the law's gaps. They contend that while the GENIUS Act grants a veneer of legal credibility to stablecoins, it simultaneously allows issuers to evade critical regulatory obligations vital for combatting serious crimes such as terrorism financing, drug trafficking, money laundering, and particularly fraud involving cryptocurrencies.
Enacted as a broad bipartisan initiative in July, the GENIUS Act was intended as a pioneering move to create official reserve requirements for stablecoin issuers that parallel those ensuring banks maintain adequate assets relative to their liabilities. Effectively, this means stablecoin firms must back each token in circulation with the equivalent value in liquid assets, including U.S. dollars or short-term government securities. However, the prosecutors specifically highlight what the legislation omits: clear mandates requiring companies to return stolen funds to those defrauded.
The letter stresses that this absence encourages stablecoin issuers to knowingly retain stolen assets under their control rather than restituting victims, thereby providing legal sanction for such conduct. The prosecutors illustrate their point by focusing on the actions of Tether and Circle, the two dominant stablecoin issuers, alleging that both companies have impeded law enforcement's attempts to recover and return money to victims, instead profiting from the continuation of fraud within the stablecoin market.
In detailing Tether's conduct, the country's largest stablecoin issuer by transaction volume, prosecutors point out that Tether possesses the technical capability to freeze suspicious transactions of its USDT coin. Yet, they contend that Tether has exercised this power only sporadically and typically in coordination solely with federal law enforcement agencies. This practice leaves many victims without recourse, as stolen funds converted into Tether's stablecoin are unlikely to be frozen or reclaimed. Prosecutors highlight that Tether currently determines on a case-by-case basis whether to assist law enforcement in recovering illicit funds and warn that nothing in the GENIUS Act prevents Tether from ceasing cooperation entirely.
Responding to these allegations, Tether issued a statement emphasizing its zero-tolerance stance toward fraud and misuse of its tokens. Based in El Salvador, the company acknowledged that it operates without the blanket legal obligations that U.S.-regulated financial institutions have regarding state civil and criminal proceedings. Nonetheless, Tether affirmed voluntary cooperation with U.S. law enforcement across federal, state, and local levels, routinely supporting investigations aimed at protecting victims and preventing further harm.
Regarding Circle, the second-largest stablecoin issuer headquartered in New York and publicly traded, prosecutors describe the company's policies as even less favorable to fraud victims compared to Tether. While Circle may consent to freezing funds linked to fraud, prosecutors claim the company retains the frozen assets and accrues interest rather than returning funds to victims. This practice creates a clear financial incentive for Circle to deny requests from law enforcement to release the funds, as the company benefits from investing the seized assets while holding them.
Circle's chief strategy officer, Dante Disparte, responded by stating that the firm prioritizes financial integrity and upholds U.S. and global regulatory frameworks related to stablecoins. He emphasized that the GENIUS Act clarifies stablecoin issuers' responsibilities to comply with existing financial integrity rules focused on combatting illicit activities, while enhancing consumer protections. Disparte asserted that Circle operates as a U.S.-regulated financial institution and will continue working to advance these standards.
The prosecutors’ letter stands as one of the most direct and pointed criticisms that law enforcement in New York has leveled at the GENIUS Act since its signing. Despite receiving broad bipartisan support, concerns linger among critics that the law does not provide strong enough consumer safeguards and could expose the conventional financial system to risks originating from crypto market instability. The letter was addressed to prominent Democratic senators, including Chuck Schumer, Kirsten Gillibrand—who has been a leading supporter of the act—and Mark Warner, a member of intelligence and banking committees. At the time of reporting, senators Schumer and Gillibrand had not issued a comment. A spokesperson for Senator Warner remarked that stablecoin issuers are obligated under the GENIUS Act to cooperate with law enforcement and comply with court orders, emphasizing ongoing Congressional efforts to evaluate whether additional legal measures are needed to expedite the freezing and recovery of stolen funds.
Stablecoins function as cryptocurrencies designed to maintain a steady value by pegging to another asset, generally the U.S. dollar. For investors seeking to avoid the considerable volatility commonly associated with cryptocurrencies like bitcoin or ether, stablecoins offer a relatively stable alternative to maintain holdings within the crypto ecosystem. Additionally, they serve as a bridge for users moving funds between cryptocurrency and the traditional financial markets, which have historically operated with little integration.
Recent data highlighted that stablecoin transaction volumes surged by 72% last year to reach $33 trillion, surpassing bitcoin in volume despite bitcoin remaining the most popular individual crypto token. However, their relative stability and transactional anonymity have also attracted criminal activity. According to Chainalysis, a crypto research firm, stablecoins account for 63% of illicit cryptocurrency transactions. The industry’s attempts to distance itself from associations with scams, cybercrime, drug trafficking, and money laundering have yet to fully address these entrenched problems.
Since 2020, illicit activities traced on the blockchain have increased annually by about 25%, as Chainalysis reports, with approximately $28 billion in illicit funds channeled into leading crypto exchanges over the preceding two years. New York prosecutors underscore that they actively investigate criminal operations exploiting stablecoins for fraud and money laundering, and strive to seize ill-gotten assets for victim restitution. Nonetheless, they argue that the GENIUS Act constrains these efforts, emboldening stablecoin issuers to resist law enforcement and maintain control over stolen funds instead of facilitating their return.
Central to their argument is that neither Circle nor Tether are legally obligated under the GENIUS Act to freeze or return stolen stablecoins consistently, allowing discretionary cooperation that ultimately disadvantages crime victims. Furthermore, prosecutors assert that both issuers generated approximately $1 billion each in 2024 from investments of their reserve funds, including those backing stolen and frozen stablecoins. As of November, Circle reportedly held over $114 million in frozen assets.
This perceived regulatory gap exemplifies ongoing challenges within the crypto industry, particularly the lack of fundamental consumer protections that are standard in traditional finance. Hilary J. Allen, a law professor specializing in banking and cryptocurrency regulation, remarked that fundamental regulatory mechanisms long established in traditional finance are notably absent in the GENIUS Act. She emphasized that the law’s failure stems not from cryptocurrency technology itself, but from business models that do not align with existing financial regulations.