New York Attorney General Letitia James and four district attorneys — including Manhattan DA Alvin Bragg — have warned in a letter to Democratic senators that the GENIUS Act, the first comprehensive U.S. stablecoin law signed by President Trump in July 2025, grants stablecoin issuers an imprimatur of legitimacy while failing to require them to return stolen funds to fraud victims. The prosecutors argue this loophole allows the two largest stablecoin issuers, Tether and Circle, to profit from frozen assets linked to criminal activity.
The GENIUS Act mandates that issuers back their tokens one-for-one with liquid assets such as U.S. dollars or short-term Treasuries, but prosecutors say it lacks restitution language — the clear mechanism that exists in traditional banking to compel the return of stolen funds. They estimate that in 2024 both Tether and Circle each generated roughly $1 billion in profit from investing their reserve funds, including reserves backing stolen and frozen stablecoins — with Circle reportedly holding more than $114 million in frozen funds as of November. According to the letter, Tether only freezes suspicious transactions on an ad-hoc basis when cooperating with federal-level law enforcement, while Circle — despite freezing assets — allegedly retains the underlying funds and continues to collect interest rather than returning them to law enforcement or victims. Chainalysis data shows stablecoins now account for 63% of illicit crypto transactions, while illicit addresses received record inflows in 2025. Circle's chief strategy officer Dante Disparte stated the company has always prioritised financial integrity, while Tether emphasised its zero-tolerance policy toward illicit activity.
The letter was addressed to Democratic Senators Chuck Schumer, Kirsten Gillibrand, and Mark Warner; Warner's office responded that protecting victims is paramount and Congress is evaluating whether additional legislative tools are needed to ensure stolen funds are returned swiftly.
Sources:
- https://edition.cnn.com/2026/02/02/business/stablecoin-genius-act-crypto
- https://yellow.com/news/manhattan-da-says-the-genius-act-has-a-fatal-flaw-that-lets-stablecoin-companies-profit-from-fraud
- https://www.cryptopolitan.com/new-york-prosecutors-target-stablecoin-firms/
- https://www.thestreet.com/crypto/markets/prosecutors-warn-new-law-lets-crypto-firms-profit-from-fraud
