US prosecutors urge tougher GENIUS Act safeguards

TLDR

US prosecutors are pushing Congress to toughen the new GENIUS Act stablecoin law, saying it lets issuers profit from crime while victims struggle to recover funds.

1. The GENIUS Act sets federal rules for USD stablecoins but, prosecutors argue, lacks explicit requirements to return stolen or frozen funds to victims.
2. New York officials say Tether (USDT) and Circle (USDC) can freeze illicit funds yet keep earning interest on reserves, while stablecoins already dominate on-chain illicit flows.
3. Lawmakers are being urged to add restitution, clawback, and cooperation rules, which could reshape stablecoin business models, user protections, and how yields or rewards are offered.

Deep Dive

1. What The GENIUS Act Actually Does

The Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act) is the first major U.S. federal framework for payment stablecoins, signed into law in July 2025. It requires issuers to hold one-to-one reserves in cash or highly liquid assets and to provide disclosures on redemption and reserves, effectively legitimizing regulated dollar-pegged stablecoins such as USDT and USDC in U.S. law.

A coalition of New York prosecutors, including Attorney General Letitia James and Manhattan DA Alvin Bragg, has told Congress that the law, as written, gives stablecoins legitimacy but does not clearly require issuers to return stolen or frozen funds to victims or comply with certain state-level forfeiture processes, leaving a gap in consumer protection under the current GENIUS Act stablecoin law.

2. Why Prosecutors See A Consumer Protection Problem

In a letter reported by CNN and crypto media, the New York officials specifically criticize Tether and Circle, arguing the GENIUS framework could "provide legal cover" for issuers to profit from crime-linked balances instead of prioritizing restitution for victims. They say Tether often freezes suspicious USDT only on a discretionary basis and claims it is not legally bound by state processes because it is based in El Salvador, while Circle may freeze funds but continue to earn interest on the reserves backing those frozen coins.

Reports cited by prosecutors claim both firms made roughly $1 billion of profit in 2024 from investing reserve assets, including those backing stolen or frozen stablecoins, and that Circle held over $100 million of frozen funds at one point, according to detailed figures on Tether and Circle. Chainalysis data referenced in these reports suggests stablecoins made up about 63 percent of illicit crypto transaction volume in 2024, underscoring why officials view the absence of clear restitution rules as a systemic risk within the current GENIUS Act design.

3. How This Could Change Stablecoins And What To Watch

The prosecutors are urging Congress to amend the GENIUS Act to add explicit safeguards, including: mandatory cooperation with law enforcement at state and federal levels, clear restitution and clawback mechanisms for victims, and potentially restrictions on profits from frozen balances, as highlighted in the New York prosecutors' letter.

This push comes alongside a separate policy fight over whether exchanges and intermediaries can offer rewards on stablecoin holdings, which banks see as a loophole that could pull deposits out of traditional accounts. Tougher GENIUS safeguards could increase compliance costs for issuers, narrow room for yield-like products, and accelerate a split between heavily regulated U.S.-facing stablecoins and more permissive offshore options.

Conclusion

US prosecutors are not attacking stablecoins as a concept so much as the way the GENIUS Act balances issuer profits against victim protection. If Congress responds with stronger restitution and cooperation rules, the result could be safer but more tightly regulated U.S. dollar stablecoins, with knock-on effects for where liquidity concentrates, how much yield is available, and which issuers remain competitive in a more bank-like regulatory environment.