Prosecutors Blast New Stablecoin Law, Alleging It Shields Firms Profiting From Fraud
New York's top law enforcement officials have launched a blistering critique of the nation's first major stablecoin legislation, warning that the new law fails to protect fraud victims and may even incentivize crypto companies to profit from crime.
In an exclusive letter obtained by CNN, New York Attorney General Letitia James and a coalition of district attorneys, including Manhattan's Alvin Bragg, argue the recently enacted GENIUS Act grants a "veneer of legitimacy" to stablecoins while allowing their issuers to sidestep robust anti-fraud and anti-money laundering safeguards. The prosecutors contend the law's most glaring omission is a mandate requiring companies to return stolen cryptocurrency to its rightful owners.
"This absence will embolden stablecoin issuers, and even provide legal cover, when they affirmatively decide to keep stolen funds under their control," the letter states, addressed to key Democratic senators including Kirsten Gillibrand, the Act's lead Democratic sponsor.
The bipartisan GENIUS Act, signed into law in July, was hailed by the crypto industry as a watershed moment—establishing a federal framework for stablecoins, digital tokens pegged to assets like the U.S. dollar. It imposes reserve requirements similar to those in traditional banking. However, critics within law enforcement now say it leaves a dangerous void.
The letter singles out industry giants Tether and Circle. It alleges Tether, the largest issuer, freezes its USDT tokens only on an ad-hoc basis, primarily cooperating with federal agencies while often leaving state and local victims without recourse. "The reality for many victims... is that funds stolen in or converted to USDT will never be frozen, seized, or returned," prosecutors write.
Circle, a publicly-traded firm headquartered in New York, faces even sharper criticism. Prosecutors claim that even when Circle agrees to freeze stolen funds, it often retains control of the underlying assets, collecting interest instead of returning them to victims. This creates a "crystal clear financial incentive" to reject law enforcement restitution requests, the letter argues.
In statements to CNN, both companies defended their practices. Tether emphasized its "zero-tolerance policy toward illicit activity" and voluntary cooperation with law enforcement. Circle's Chief Strategy Officer, Dante Disparte, stated the company "has always prioritized financial integrity" and follows prevailing rules as a U.S.-regulated entity.
The clash highlights a central tension in crypto regulation: balancing innovation with consumer protection. Stablecoins, with a staggering $33 trillion in transaction volume last year, have become the plumbing of the crypto economy. Yet, according to blockchain analytics firm Chainalysis, they also now facilitate 63% of all illicit crypto transactions.
"The GENIUS Act reflects a fundamental misunderstanding," said Hilary J. Allen, a law professor at American University. "Decades of consumer protection norms in traditional finance were set aside. The laws were never incompatible with the technology; they were incompatible with the crypto business model."
/// USER COMMENTARY ///
Marcus Chen, Fintech Analyst (San Francisco): "This is a predictable growing pain. The GENIUS Act was a necessary first step to provide baseline clarity. Expect amendments, but you can't build perfect oversight into version 1.0 of a law for a rapidly evolving asset class."
David Petrovsky, Former SEC Investigator (Miami): "The prosecutors are absolutely right. The law creates a glaring loophole. If a bank held stolen cash, they couldn't just invest it for profit while telling the police it's 'complicated.' This isn't innovation; it's a regulatory carve-out."
Eliza Rodriguez, Consumer Advocate (Chicago): "It's outrageous! The law literally writes a profit-making scheme for crypto companies off the backs of scam victims into the legal code. How many retirees need to lose their savings before Congress fixes this? It's a disgrace."
Rohan Mehta, Crypto Venture Capitalist (Austin): "The letter focuses on extremes. The vast majority of stablecoin use is legitimate. The industry is working with regulators. Framing this as 'profiting from fraud' ignores the active compliance efforts and the Act's role in bringing a $10T market out of the shadows."
A spokesperson for Senator Mark Warner indicated Congress is "continuing to evaluate whether additional legislative tools are needed." Senators Schumer and Gillibrand did not immediately respond to requests for comment.