GENIUS Act Faces Scrutiny as New York Flags Stablecoin Risk
- Prosecutors argue the GENIUS Act legitimizes stablecoins without firm fraud defenses.
- New York officials link stablecoin use to most illicit crypto activity in 2025 globally.
- Tether and Circle policies draw focus as victims face delays in fund recovery efforts.
New York’s top prosecutors have warned that the GENIUS Act, the crypto industry’s first major U.S. law, fails to protect fraud victims and risks shielding companies that profit from wrongdoing. In a letter obtained by CNN, New York Attorney General Letitia James and four district attorneys, including Manhattan’s Alvin Bragg, argued that the law grants stablecoins unwarranted legitimacy.
They said the statute allows stablecoin issuers to avoid key regulatory duties needed to fight terrorism financing, drug trafficking, money laundering, and cryptocurrency fraud, raising fresh questions about consumer protection.
At the center of the dispute sits the GENIUS Act, signed into law in July as a bipartisan effort to regulate stablecoins. The law requires issuers to back each coin one-for-one with liquid assets like dollars or short-term Treasuries, mirroring bank-style reserve rules.
Yet prosecutors argue that reserve requirements alone do not address how criminals use stablecoins at scale, especially across borders. If stablecoins now carry federal legitimacy, who bears responsibility when fraud victims cannot recover their losses?
Prosecutors Cite Illicit Finance Risks
New York prosecutors pointed to stablecoins’ growing role in illicit finance as a central weakness in the new framework. They cited a 2025 report from Chainalysis, which estimated that 84% of illicit crypto transaction volume involved stablecoins.
According to the letter, criminals favour stablecoins for cross-border transfers and lower volatility, which makes funds easier to move quickly. Prosecutors argued that the GENIUS Act lacks fraud prevention and restitution provisions that exist in traditional finance.
They said those gaps leave victims with limited recourse, even as stablecoins integrate further into mainstream financial activity. The letter warned that without stronger obligations, issuers can operate while sidestepping enforcement tools that authorities rely on in other markets.
Tether and Circle Face Scrutiny
The letter singled out Tether and Circle, the two largest stablecoin issuers by market value. Prosecutors said both firms earn interest on reserves that can include stolen customer funds, since they hold cash and yield-bearing Treasuries.
They noted that Tether has frozen stolen funds in some cases, though it claims no legal duty to comply with U.S. state processes. In a statement to The Block, Tether said it takes fraud and consumer harm seriously. Tether said it is not U.S.-domiciled and operates outside U.S. jurisdiction, yet it added that it voluntarily works with U.S. law enforcement at all levels.
Prosecutors described Circle as less responsive, saying it freezes funds only after receiving a signed judicial order or warrant. They warned that delays allow criminals to move or convert funds before authorities can act.
Circle executive Dante Disparte said the company prioritizes compliance with global and U.S. stablecoin regulations.
Related: FDIC Proposes First Stablecoin Rule Under GENIUS Act
Consumer Protection Questions Persist
For critics, the prosecutors’ letter reflects broader concerns about consumer safeguards in crypto markets. American University law professor Hilary J. Allen told CNN that basic protections common in traditional finance remain absent from the GENIUS Act.
She said traditional financial laws already addressed many risks, and the conflict stemmed from crypto business models rather than technology itself. Prosecutors echoed that view by warning that legitimacy without accountability could deepen harm to fraud victims.
They urged lawmakers to reconsider whether the current framework truly matches the risks now tied to stablecoins.
