GENIUS Act Sparks Fierce Legal Clash as New York Prosecutors Decry Stablecoin Fraud Loopholes
NEW YORK, April 2025 – A stark warning from top New York law enforcement officials has ignited a fierce debate over the nation’s new stablecoin framework, alleging critical flaws that could enable financial criminals to operate with impunity. According to a confidential letter obtained by CNN and signed by New York Attorney General Letitia James and four district attorneys, the recently enacted GENIUS Act provides insufficient guardrails against fraud, potentially offering “legal cover” to major stablecoin issuers. This development marks a significant escalation in the ongoing tension between state-level prosecutors and federal cryptocurrency legislation, raising urgent questions about consumer protection in the digital asset ecosystem.
The GENIUS Act Faces Scrutiny Over Fraud Provisions
President Donald Trump signed the GENIUS Act into law in July 2024, establishing the first comprehensive federal framework for payment stablecoins in the United States. Consequently, the legislation mandates a structured implementation timeline, requiring full effect within 18 months of enactment or 120 days after relevant agencies finalize accompanying regulations. However, New York prosecutors now argue the law’s current construction creates dangerous vulnerabilities. Specifically, their letter contends that the act fails to impose uniform, mandatory obligations on issuers to cooperate with law enforcement in fraud and theft cases. This regulatory gap, they assert, allows companies to selectively assist authorities, thereby profiting from the continued circulation of stolen funds.
Furthermore, the prosecutors’ critique centers on the operational policies of the two dominant stablecoin issuers: Tether (issuer of USDT) and Circle (issuer of USD Coin). Their analysis presents a detailed comparison of how each company currently handles illicit transactions. For instance, the letter highlights that Tether, which is headquartered in El Salvador, maintains it lacks a “blanket legal obligation” to comply with U.S. state-level civil or criminal processes. Meanwhile, Circle, a U.S.-regulated entity, publicly champions financial integrity. Despite this, the officials claim its victim reimbursement policies are “significantly worse” in practice. This discrepancy underscores a core challenge in regulating global digital assets with varying jurisdictional allegiances.
Expert Analysis on the Enforcement Dilemma
Legal experts specializing in financial technology note that this conflict exemplifies a broader regulatory schism. “The federal GENIUS Act aims to create a national standard for innovation and market stability,” explains a former SEC enforcement attorney who requested anonymity due to ongoing client work. “Conversely, state attorneys general, particularly in financial hubs like New York, are on the front lines of consumer fraud. Their primary concern is victim restitution and prosecuting bad actors, which requires predictable, enforceable cooperation from issuers.” This fundamental difference in priorities—fostering innovation versus preventing crime—creates the friction evident in the prosecutors’ letter. Moreover, the 18-month implementation window provides a critical period for potential legislative amendments or clarifying regulations to address these flagged concerns.
Prosecutors Target Tether and Circle’s Business Practices
The New York officials’ letter delivers pointed accusations against the leading stablecoin firms, providing specific examples of alleged deficiencies in their fraud prevention protocols. A central allegation against Tether involves its case-by-case approach to freezing wallets associated with stolen funds. The prosecutors argue this discretionary model leaves victims without recourse. “The reality for many victims… is that funds stolen in or converted to USDT will never be frozen, seized, or returned,” the letter states. They warn that nothing in current law prevents Tether from ceasing all cooperation with U.S. law enforcement entirely, a scenario that would cripple fraud investigations.
Regarding Circle, the critique is notably nuanced. The company’s Chief Strategy Officer, Dante Disparte, has publicly stated that Circle “has always prioritized financial integrity” and will adhere to the GENIUS Act’s rules. Nevertheless, the prosecutors challenge the practical outcome of its policies for fraud victims. Their analysis suggests that while Circle’s compliance framework appears robust on paper, the actual process for victims to recover stolen funds can be prohibitively slow or complex. This highlights a recurring theme in crypto regulation: the difference between theoretical compliance and effective, real-world consumer protection.
- Tether’s Position: Emphasizes a zero-tolerance policy but operates under international jurisdiction, limiting direct U.S. legal compulsion.
- Circle’s Position: Promotes its status as a U.S.-regulated entity but faces criticism over the practical efficacy of its fraud response.
- Prosecutors’ Demand: Seek unambiguous, legally binding requirements for issuer cooperation in fraud cases within the stablecoin law.
The Political and Regulatory Landscape Intensifies
This legal alarm coincides with a shifting political landscape in New York. Attorney General Letitia James, a prominent figure in crypto industry litigation, may face a challenger in the 2026 election who is aligned with digital asset interests. Former Coinbase policy lawyer Khurram Dara has announced a Republican campaign, accusing James of engaging in “lawfare” against the crypto sector. This political dynamic adds a layer of complexity to the regulatory debate, suggesting that the enforcement philosophy of the New York Attorney General’s office could evolve depending on the election’s outcome. Both potential candidates face an April filing deadline, setting the stage for a campaign where cryptocurrency regulation will likely be a central issue.
Simultaneously, the federal government is in the active rulemaking phase for the GENIUS Act. Agencies like the Treasury and the Federal Reserve are drafting the specific regulations that will give the law its teeth. The concerns raised by New York prosecutors will undoubtedly influence these discussions. Regulatory analysts predict that the final rules may incorporate stronger anti-fraud and law enforcement cooperation mandates to bridge the gap identified by state officials. The coming months will therefore be crucial for stakeholders, as the technical details of the regulatory framework are finalized.
Comparative Table: Key Concerns in the Stablecoin Debate
| Issue | Prosecutors’ Stance | Industry Stance (via GENIUS Act) |
|---|---|---|
| Law Enforcement Cooperation | Must be mandatory, uniform, and timely for all issuers. | Required but specifics delegated to regulatory rulemaking. |
| Victim Recovery | Clear, fast-track processes needed for stolen stablecoins. | Consumer protections are outlined but implementation is pending. |
| Jurisdictional Reach | U.S. law must apply to all issuers serving U.S. customers. | Recognizes challenges with foreign-domiciled issuers like Tether. |
| Regulatory Clarity | Current law is too vague, creating exploitable loopholes. | Act provides a foundational framework for further clarification. |
Conclusion
The forceful warning from New York prosecutors underscores a pivotal moment for stablecoin regulation in the United States. While the GENIUS Act represents a landmark step toward legitimizing digital dollar alternatives, its effectiveness hinges on closing the fraud enforcement gaps highlighted by frontline law enforcement. The detailed allegations against Tether and Circle reveal a system where policy and practice can diverge, leaving consumers exposed. As federal regulators draft the final rules and New York’s political climate evolves, the core challenge remains: crafting a regulatory environment that fosters responsible innovation while ensuring robust, unambiguous protections against financial crime. The resolution of this clash will shape the safety and integrity of the stablecoin market for years to come.
FAQs
Q1: What is the GENIUS Act?
The Generative Economic Networks and Inclusive Uses of Stablecoins (GENIUS) Act is a U.S. federal law signed in July 2024. It establishes the first comprehensive regulatory framework for payment stablecoins, setting rules for issuance, reserves, and consumer protection.
Q2: Why are New York prosecutors concerned about the law?
They argue the act lacks strong, mandatory requirements for stablecoin issuers to cooperate with law enforcement in fraud cases. They believe this allows companies like Tether and Circle to operate with too much discretion, potentially letting criminals profit and hindering victim recovery.
Q3: What specific accusations do they make against Tether?
Prosecutors accuse Tether of freezing stolen funds only on a selective, case-by-case basis. They note the company is based in El Salvador and states it has no blanket obligation to comply with U.S. state legal processes, which could leave victims without recourse.
Q4: How does Circle respond to these criticisms?
Circle states it prioritizes financial integrity and will follow all U.S. regulations. However, prosecutors contend that its actual policies for helping fraud victims recover funds are ineffective and, in some ways, worse than Tether’s.
Q5: What happens next with the GENIUS Act?
Federal agencies are now drafting the detailed regulations to implement the law. The concerns raised by New York officials will likely influence this rulemaking process, potentially leading to stricter anti-fraud and law enforcement cooperation requirements before the law is fully implemented in late 2025 or early 2026.
