Prosecutors Sound Alarm: New Stablecoin Law May Leave Fraud Victims Unpaid as Issuers Profit
WASHINGTON – The recent passage of the first major federal stablecoin law was hailed by the industry as a milestone for legitimacy. Now, a stark warning from top New York prosecutors is casting a shadow over the celebration, alleging the new rules may inadvertently enable fraud and leave victims empty-handed.
The Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act), signed into law on July 18, 2025, establishes a federal framework for payment stablecoins. It mandates that issuers like Tether and Circle maintain full, transparent reserves in cash and short-term U.S. Treasuries, a move long sought to reduce systemic risk.
However, in a letter now circulating among policymakers, New York Attorney General Letitia James and a group of district attorneys, including Manhattan's Alvin Bragg, argue the law has a dangerous gap. They contend it grants stablecoins an "imprimatur of legitimacy" without requiring issuers to return stolen or frozen funds to defrauded consumers.
"The statute focuses on reserve adequacy and operational stability, but is silent on victim restitution," the prosecutors' analysis states. "This allows issuers to freeze assets linked to scams—and continue earning interest on the underlying reserves—while victims face a protracted, uncertain fight to recover their money."
The warning highlights a central tension as stablecoins evolve from crypto trading tools into a parallel payments system: how to balance innovation with consumer protection. Federal Reserve researchers have noted stablecoins' growing influence on short-term credit markets, while blockchain analytics firm Chainalysis reported stablecoins facilitated roughly 63% of illicit crypto transaction volume in 2024.
Circle Chief Strategy Officer Dante Disparte defended the law in a statement, saying it "strengthens consumer protections and clarifies rigorous rules that issuers must follow to combat illicit finance." Industry advocates argue the GENIUS Act provides a crucial foundation, and that restitution complexities are better handled in existing fraud and property laws.
Yet critics fear that without explicit "clawback" provisions in the stablecoin law itself, the financial incentives may be misaligned. "The cost of fraud is being socialized to victims and the public, while private issuers can still profit from the float," said a policy aide familiar with the prosecutors' concerns.
User Commentary:
Michael R. (Financial Compliance Analyst, Chicago): "This is a predictable oversight in a first-of-its-kind law. The focus was understandably on preventing a Terra/Luna-style collapse. The next legislative phase must address the consumer liability framework. It's a complex but necessary evolution."
Sarah Chen (Fintech Investor, San Francisco): "The prosecutors' letter reads as fearmongering. The GENIUS Act is a net positive that brings clarity. Forcing issuers to adjudicate every fraud claim would cripple the technology's utility. Existing legal channels for recovery exist for a reason."
David Park (Retired Engineer & Crypto User, Austin): "It's a slap in the face to ordinary users. They're basically saying the law protects the companies' right to make money off our stolen funds while we get the runaround. Where's the 'genius' in that? It's a glaring loophole that smells like regulatory capture."
Eleanor Vance (Law Professor, Georgetown University): "This exposes the fundamental challenge of regulating novel asset classes with old legal concepts. Is a stolen stablecoin a 'mislaid chattel' or an unauthorized wire transfer? The law's silence on restitution kicks this can down the road, ensuring costly litigation."
This analysis is based on a report first published by TheStreet on February 2, 2026.