TLDR
New York prosecutors are attacking the new U.S. federal stablecoin law, arguing it helps issuers like Tether and Circle profit from fraud while leaving victims exposed.
- The GENIUS Act, a 2025 federal stablecoin law, requires 1:1 reserves but does not clearly require issuers to return stolen or frozen funds to victims.
- New Yorks attorney general and several district attorneys say this gives stablecoin issuers legal cover and cite Tether and Circles handling of frozen USDT and USDC as proof.
- Congress is already being urged to amend the law, so stablecoin users should watch for changes to restitution rules and law enforcement cooperation requirements.
Deep Dive
1. What The New Law Actually Does
The Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act) became the first major federal framework for payment stablecoins in July 2025. It requires issuers to keep coins backed 1:1 with cash or highly liquid assets such as short term U.S. Treasuries and to provide reserve and redemption disclosures under the new law.
This gives dollar stablecoins clearer federal legitimacy and a bank like reserve standard, which is why large issuers and parts of the crypto industry welcomed it.
The law squarely recognizes regulated dollar stablecoins as part of the financial system but leaves important design details open to challenge.
2. Why New York Prosecutors Are Pushing Back
New York Attorney General Letitia James and Manhattan DA Alvin Bragg, along with other DAs, sent a letter warning the law gives issuers legal cover while failing to guarantee that stolen funds are returned to victims according to CNN.
They highlight that Tether (USDT) and Circle (USDC) can freeze suspicious assets, continue earning yield on the reserves behind those frozen tokens, and are not clearly compelled to return those funds. Prosecutors estimate each firm made about 1 billion dollars in 2024 from investing reserves, including backing frozen coins, and point to more than 100 million dollars of frozen USDC as of late 2025.
Chainalysis data cited in the letter says stablecoins account for roughly 63 percent of illicit crypto transaction volume, so gaps around restitution and cooperation directly affect a large share of crypto crime flows.
The fight is not about whether stablecoins exist, but about who bears fraud losses and how much pressure issuers face to help victims.
3. What Could Happen Next
The prosecutors letter was sent to key senators, including Majority Leader Chuck Schumer and GENIUS Act co sponsor Kirsten Gillibrand, and Senator Mark Warners office has already signaled that additional victim protections may be considered in follow up legislation.
Potential changes could include explicit requirements to return frozen funds, clearer timelines and standards for freezing, and stronger obligations to honor state level law enforcement processes, which Tether has argued it is not strictly bound by as an El Salvador based company.
For users and institutions relying on USDT, USDC or future U.S. regulated stablecoins, this political battle could reshape how safe frozen funds are and how quickly fraud cases can be unwound.
Conclusion
New York prosecutors are not trying to kill stablecoins; they are challenging a federal law they see as too issuer friendly and too light on victim restitution. How Congress responds will determine whether the U.S. stablecoin regime leans more toward payment innovation or toward traditional banking style consumer protections, and that balance will shape risk for anyone holding or building on top of dollar stablecoins.
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