US prosecutors criticize new stablecoin GENIUS Act

TLDR

US prosecutors say the new GENIUS Act makes stablecoins look safer but leaves fraud victims exposed and lets issuers profit from frozen or stolen funds.

1. New York prosecutors argue the GENIUS Act gives Tether (USDT) and Circle (USDC) legal cover to keep stolen stablecoins value instead of returning it to victims.
2. The law does tighten reserves and licensing for payment stablecoins, but critics say it ignores restitution and rising illicit use of stablecoins.
3. For users, reserve risk is lower but legal protections after scams or hacks remain uncertain, and Congress may add tougher rules on clawbacks and rewards.

Deep Dive

1. What Prosecutors Are Saying

A coalition led by New York Attorney General Letitia James and Manhattan DA Alvin Bragg sent a letter warning that the GENIUS Act fails to protect fraud victims and could provide legal cover for issuers to profit from crime involving stablecoins like USDT and USDC.

They argue Tether often freezes suspicious transactions only selectively, while Circle allegedly freezes but does not return funds, continuing to earn interest on the reserves backing those frozen tokens, with prosecutors estimating roughly $1 billion in 2024 profits tied to invested reserves and citing more than $114 million in frozen Circle funds as of November.

Chainalysis data cited in the same reporting says stablecoins account for about 63% of illicit crypto transactions, with blockchain crime growing roughly 25% annually and $28 billion in criminal funds sent to exchanges over two years, which prosecutors say magnifies the impact when restitution is not required.

2. What The GENIUS Act Actually Does

The GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act) is the first major U.S. federal framework for payment stablecoins, signed in July 2025, requiring one to one backing in cash and high quality liquid assets like short term U.S. Treasuries and clear redemption disclosures.

It also restricts stablecoin issuers from paying interest, while still allowing exchanges and intermediaries to offer rewards on balances, a structure banks call a loophole because it may still pull deposits out of the banking system.

Supporters, including Circle, say the law strengthens financial integrity rules and provides clarity that has encouraged regulated products like new U.S. compliant stablecoins, while critics argue it omits basic consumer safeguards such as explicit refund and clawback obligations.

3. Implications For Stablecoin Users

For day to day users, GENIUS style rules reduce the chance that a regulated U.S. payment stablecoin is under?collateralized, but they do not guarantee you get your money back if a scam or hack routes funds into a stablecoin.

The prosecutors push increases the odds that Congress will revisit the law to require stronger cooperation with law enforcement and clearer restitution rights, and could also narrow the room for yield or rewards programs around U.S. stablecoins.

Conclusion

The GENIUS Act gave stablecoins a long?awaited federal framework on reserves and licensing, but prosecutors now argue it underweights victim protection and crime. As Congress weighs amendments and banks push on the rewards loophole, the U.S. stablecoin landscape could shift again, improving legal recourse for victims but also tightening how compliant dollar tokens can be used and monetized.