New York Prosecutors Blast Stablecoin Law, Alleging It Shields Tether and Circle from Fraud Liability

New York's top law enforcement officials launched a direct assault on the nation's new stablecoin regulatory framework Monday, arguing the law effectively grants issuers like Tether and Circle a license to profit from financial crimes at the expense of victims.

In a letter signed by Attorney General Letitia James and four district attorneys—including Manhattan's Alvin Bragg—prosecutors contend the GENIUS Act, signed into law by President Trump last July, provides "legal cover" for companies to withhold stolen funds. They assert the law's lack of mandatory restitution language has created a perverse incentive, allowing issuers to invest reserve funds backing frozen, illicit stablecoins for substantial profit.

"This isn't just a regulatory gap; it's a windfall for bad actors," the letter states. "The Act bestows an imprimatur of legitimacy while stripping away essential tools to combat terrorism financing, trafficking, and rampant crypto fraud."

The prosecutors cite internal estimates showing Tether and Circle each generated approximately $1 billion in profits in 2024 from investing their reserve funds. Those reserves, they note, include assets backing stolen or frozen stablecoins. As of November, Circle held over $114 million in frozen funds, while Tether reported freezing $3.3 billion in USDT since 2023.

While both companies highlight their cooperation with law enforcement—Tether has blacklisted thousands of addresses—the core legal conflict hinges on jurisdiction. Tether, headquartered in El Salvador, stated it lacks a "blanket legal obligation" to comply with U.S. state-level processes. Circle's Chief Strategy Officer Dante Disparte defended the company's integrity, saying the GENIUS Act "makes clear that issuers must abide by applicable financial integrity rules."

Prosecutors sharply disagree, alleging Circle's policies are "significantly worse than those of Tether for victims of fraud" and that the company has "chosen to actively thwart law enforcement."

The criticism arrives at a politically charged moment. Khurram Dara, a former Coinbase lawyer, has announced a Republican challenge to James for the Attorney General seat, accusing her of "lawfare and regulatory overreach" that harms New York's business climate.

Legal experts say the dispute exposes a fundamental flaw in the new framework. "Decades of trial and error in traditional finance settled these restitution issues," said Hilary J. Allen, a banking law professor at American University. "That mundane but critical machinery is absent from the GENIUS Act."

For financial institutions, the concern is operational. Traditional banks face civil forfeiture laws compelling cooperation. The new federal stablecoin framework, however, explicitly allows issuers to decline state-level requests for frozen assets, creating a potential safe harbor for illicit proceeds.

Voices from the Industry

Marcus Chen, Fintech Compliance Officer: "The prosecutors have a point on victim restitution, but the GENIUS Act was a necessary first step for federal clarity. The next amendment must address this liability gap without stifling innovation."

Eleanor Vance, Consumer Advocacy Group Director: "It's outrageous. The law is literally written to let billion-dollar companies bankroll themselves with stolen money from ordinary people. This isn't innovation; it's institutionalized theft with a federal seal of approval."

David Park, Crypto Hedge Fund Analyst: "The market has priced in regulatory risk, but operational uncertainty is the real headache. If state and federal authorities are at odds on asset recovery, it creates impossible compliance hurdles for any institution touching stablecoins."

Rebecca Soto, Former Federal Regulator: "This letter is a warning shot. If Congress doesn't clarify restitution rules, we'll see a patchwork of state-level lawsuits that could fracture the U.S. stablecoin market entirely."