NY prosecutors oppose GENIUS Act stablecoin law

TLDR

New York prosecutors are challenging the U.S. GENIUS Act stablecoin law, saying it favors issuers like Tether and Circle over fraud victims.

1. The GENIUS Act sets the first federal rules for payment stablecoins but, prosecutors say, fails to require issuers to return stolen or frozen funds.
2. Officials argue this lets Tether (USDT) and Circle (USDC) profit from crime-linked balances while victims remain uncompensated, amid high stablecoin use in illicit activity.
3. Congress is under pressure to amend the law, and future changes could tighten obligations on stablecoin issuers and reshape how U.S. users hold and earn on stablecoins.

Deep Dive

1. Why Prosecutors Are Pushing Back

The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act became law in July 2025, creating the first federal framework for payment stablecoins pegged to the U.S. dollar. It requires issuers to hold one-to-one reserves in cash or highly liquid assets and to make reserve and redemption disclosures.[](https://finance.yahoo.com/news/prosecutors-warn-law-lets-crypto-193843399.html)

New York Attorney General Letitia James, Manhattan DA Alvin Bragg, and several other district attorneys sent a letter to senior senators arguing the law gives stablecoins legal cover while failing to protect victims of fraud.[](https://edition.cnn.com/2026/02/02/business/stablecoin-genius-act-crypto)

Their core complaint is that the statute does not obligate issuers to return stolen or frozen funds, even when those funds are clearly tied to scams or hacks.

2. How The Law Impacts Tether, Circle, And Victims

Prosecutors point to Tether and Circle as examples of how the current setup can benefit issuers. They say both companies can freeze suspicious stablecoins, keep the reserves invested, and earn interest while victims wait or never see restitution.[](https://edition.cnn.com/2026/02/02/business/stablecoin-genius-act-crypto)

Estimates cited in the letter claim each firm made about $1 billion in 2024 from investing reserves, including assets backing frozen or stolen coins, and that Circle held more than $100 million in frozen funds as of late 2025.

Chainalysis data referenced by officials indicates stablecoins account for roughly 63% of illicit crypto transactions, highlighting that most on-chain criminal flows now prefer stablecoins over volatile tokens.[](https://edition.cnn.com/2026/02/02/business/stablecoin-genius-act-crypto) Tether says it cooperates with U.S. law enforcement but is not bound by state-level processes; Circle argues it already follows U.S. financial integrity rules and supports stronger protections.

3. What Could Happen Next For Stablecoin Regulation

New York prosecutors are effectively asking Congress to revisit the GENIUS Act to add explicit victim restitution rules and stronger obligations to cooperate with both federal and state authorities.

Separately, the White House and lawmakers are still negotiating broader crypto market structure rules and how far to allow rewards or yield on stablecoin balances offered by third parties, which banks see as a threat to deposits.[](https://finance.yahoo.com/news/white-house-meets-crypto-banking-170945148.html)

For stablecoin users, stricter amendments could mean more bank-like treatment: clearer protections if funds are stolen, but also more invasive compliance, standardized freezing processes, and tighter oversight of how platforms can pay yield on stablecoin holdings.

Conclusion

The GENIUS Act was meant to legitimize dollar stablecoins and anchor them in U.S. financial rules, but New York prosecutors argue it left a critical hole around fraud and victim restitution. How Congress responds will shape whether stablecoins operate more like tightly regulated dollar accounts or remain a higher-risk parallel system, with direct implications for how safely and flexibly crypto users can hold and move U.S. dollar value on-chain.