TLDR
United States prosecutors say the new GENIUS Act stablecoin law makes it too easy for issuers to profit from crime and too hard for victims to get their money back.
- The GENIUS Act sets the first federal rules for dollar stablecoins but leaves big gaps on fraud, restitution, and law enforcement powers.
- New York prosecutors argue Tether (USDT) and Circle (USDC) can freeze stolen coins yet keep the interest on reserves, creating incentives not to return funds.
- Lawmakers are already under pressure to amend the law, and any changes could affect how stablecoins are treated, used, and rewarded in the United States.
Deep Dive
1. What The GENIUS Act Actually Does
The Guiding and Establishing National Innovation for U.S. Stablecoins Act, or GENIUS Act, is the first major federal framework for payment stablecoins in the United States. It was signed into law in July 2025 and requires issuers to back stablecoins one for one with cash or highly liquid assets like short term Treasuries, plus disclosure around reserves and redemption terms.
Coverage from traditional media describes it as a milestone that formally legitimizes dollar stablecoins such as Tether (USDT) and Circles USDC as part of the payments system, while banning issuers from paying interest or yield directly on those coins. However, the law allows exchanges and other third parties to offer rewards on stablecoin balances, which banks already view as a loophole that could pull deposits out of traditional accounts.
The GENIUS Act puts stablecoins closer to a regulated money like product in the US, but it focuses on reserves and structure, not on what happens when something goes wrong.
2. Why Prosecutors Say It Helps Crime
A coalition of New York officials, including Attorney General Letitia James and Manhattan District Attorney Alvin Bragg, sent a letter warning that the GENIUS Act may provide legal cover for issuers to profit from fraud involving stablecoins such as USDT and USDC. They argue the law does not require issuers to cooperate fully with state level law enforcement or to return stolen funds to victims.
Reports summarizing the letter say Tether and Circle have frozen large amounts of suspicious stablecoins but can keep earning interest on the reserves backing those frozen tokens, with prosecutors estimating each made about 1 billion dollars in 2024 from investing reserves, including those tied to frozen or stolen coins. Separate analysis cited by policymakers notes that stablecoins made up around 63 percent of illicit crypto transactions in 2024.
The criticism is less about reserves being real and more about incentives. If issuers keep the yield while victims wait, they have little financial reason to prioritize restitution.
3. What To Watch Next For Stablecoin Users
Prosecutors have urged key senators to strengthen the law with explicit victim restitution and clearer obligations to respond to state level seizure or forfeiture orders. That keeps the door open for amendments that could change how quickly and under what conditions issuers must freeze, seize, or reissue coins.
At the same time, banks are lobbying to close the rewards loophole that lets non banks pay perks on stablecoin balances, while crypto firms push to keep those features as a competitive edge. How Congress resolves this tension will shape whether stablecoins function more like bank deposits, like payment apps, or as a hybrid.
For users, the headline risk is not peg stability right now, but evolving rules around freezes, clawbacks, and yields that could change how safe and attractive US facing stablecoins look over the next few years.
Conclusion
Prosecutors criticism of the GENIUS Act highlights a shift in the stablecoin debate from are reserves real toward who bears fraud losses and who captures the yield. As Congress weighs amendments and banks fight over rewards, the regulatory perimeter around US dollar stablecoins is likely to tighten, affecting issuers like Tether and Circle and the platforms that build on top of them.
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