- New York prosecutors warn federal stablecoin law could increase fraud risks
- Tether and Circle face scrutiny over fund freezing and victim recovery
- Political pressure grows as crypto regulation shapes New York elections
New York prosecutors have warned that a new federal stablecoin law could expose consumers to higher fraud risks, with concerns centered on the GENIUS Act signed into law by President Donald Trump in July. State officials argue the framework may weaken their ability to protect victims.
A joint letter from New York Attorney General Letitia James and four district attorneys outlined the risks, stating that the law may unintentionally shield stablecoin issuers. Consequently, they fear that criminals could exploit regulatory gaps. The prosecutors stressed that stablecoins already feature heavily in online scams and emphasized that rapid intervention remains critical for asset recovery. They believe the federal framework slows enforcement responses.
The letter argued that the GENIUS Act limits state authority during fraud investigations and warned that delayed action often leads to permanent financial losses. As a result, victims may struggle to reclaim stolen funds.
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Tether Under Fire Over Freezing and Recovery Practices
The prosecutors placed significant focus on stablecoin issuer Tether, claiming the company has benefited from criminal activity within stablecoin markets. The letter alleged that Tether freezes only selected suspicious USDT transactions, raising concerns among state officials. State officials warned that many stolen funds remain active on the blockchain, and victims often lose any chance of recovery. The letter added that Tether decides cooperation with law enforcement on an individual basis.
Prosecutors argued that this level of discretion creates uncertainty and weakens deterrence across the market. Furthermore, they said no requirement ensures consistent assistance for victims, which makes the system unpredictable.
Tether responded by stating it maintains a zero-tolerance policy toward illicit activity and takes fraud and consumer harm seriously. However, the company noted differences in its legal obligations. Tether operates from El Salvador, which places it outside the United States jurisdiction. As a result, the company said it does not follow state-level enforcement processes and defended its existing compliance efforts.
Circle Response and Defense of Federal Oversight
The letter also addressed Circle, another major stablecoin issuer, as prosecutors acknowledged its public opposition to financial crime but said its recovery policies offer limited relief to victims. Circle’s chief strategy officer Dante Disparte defended the company’s record, saying Circle prioritizes financial integrity and regulatory compliance while adding that the GENIUS Act reinforces consumer protection rules.
Disparte stated that Circle follows standards expected of US-regulated financial institutions and added that the company supports efforts against illicit activity, rejecting claims that the law weakens oversight. The GENIUS Act establishes a national framework for payment stablecoins, with implementation set to begin within 18 months or after regulatory approval, as supporters argue the law provides clarity and consistency.
Political Tensions Add Pressure to the Debate
The dispute carries political weight in New York, as Letitia James has not ruled out seeking reelection as attorney general. Meanwhile, crypto regulation has emerged as a visible campaign issue. Former Coinbase policy lawyer Khurram Dara has announced plans to challenge James, accusing her office of targeting the crypto industry, with both candidates facing an April 6 filing deadline.
In conclusion, New York prosecutors argue the GENIUS Act risks increasing fraud exposure for consumers. Stablecoin issuers, however, maintain the law strengthens oversight and financial integrity.
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