Stablecoin Law Sparks Backlash as NY AG Warns of Weak Fraud Protections

Officials say stablecoin rules give issuers authority without forcing them to return stolen funds to victims.

New York prosecutors argue the GENIUS Act fails to protect victims of crypto fraud. In a letter to lawmakers, they warn the bill grants stablecoin issuers legal approval without requiring them to return stolen funds. Officials are also concerned about how issuers freeze assets, work with law enforcement, and manage customer reserves.

Law Enforcement Raises Red Flags Over Recovery of Stolen Stablecoins

New York Attorney General Letitia James and four district attorneys have raised alarms over the Guiding and Establishing National Innovation for U.S. Stablecoins Act. In a letter sent to senior Democratic lawmakers, prosecutors argue the law fails to require issuers to return stolen assets to victims.

Signed into law last year by President Donald Trump, the GENIUS Act sets national standards for stablecoins. Rules require full backing by U.S. dollars or similar liquid assets.

Annual audits apply to issuers with market values above $50 billion. Provisions also cover foreign issuance and basic compliance steps. Prosecutors say those measures do not address fraud recovery, a growing problem in crypto markets.

According to the letter, criminals prefer fiat-pegged assets because they move easily across borders and keep a steady value. A Chainalysis report estimates that most illegal crypto activity in 2025 involved these tokens.

Moreover, authorities argue that current rules do little to help after funds are stolen. Victims often face long delays or dead ends when seeking recovery.

Prosecutors Question Tether and Circle Policies on Stolen Crypto Funds

In the letter, Tether and Circle receive special scrutiny as both firms hold reserves in cash or cash-like assets. Prosecutors say that structure allows issuers to profit even when customer funds are frozen. Tether has, in some cases, frozen stolen funds, but the letter states that no legal duty compels it to do so.

Law enforcement officials warn that Tether decides whether to help on a case-by-case basis. Nothing in the law requires reissuance or repayment to victims. As a result, funds converted into USDT may never be returned.

Furthermore, Tether has stated that it takes fraud and misuse seriously and maintains a zero-tolerance policy on illicit activity.

On the other hand, authorities say Circle deserves more criticism because it does less to help fraud victims. They added that the New York-based issuer presents itself as a partner against financial crime, yet offers weaker protections for victims.

Even when Circle freezes funds, officials claim the company often keeps them instead of returning assets to victims. Interest earned on underlying reserves remains with the firm.

Circle also requires a signed court order or warrant before freezing funds. Given the speed of crypto transactions, officials say stolen assets are often moved or converted before orders are secured.

Dante Disparte, chief strategy officer of Circle, responded by pointing to support for U.S. and global stablecoin rules. He said Circle focuses on compliance and lawful processes.

Prosecutors counter that lawful processes alone are insufficient when fraud moves faster than the courts.