GENIUS Act loopholes allow stablecoin issuers to profit from fraud, prosecutors allege
The US stablecoin law, hailed as a historic breakthrough for crypto sector regulation, is now in the sights of New York prosecutors. They allege that the GENIUS Act, signed by President Trump in July 2025, fails to protect fraud victims and deliberately allows companies like Tether and Circle to profit from stolen funds. One year after its entry into force, the balance sheet of this pioneering legislation is being widely questioned by American judicial authorities.
On February 2, 2026, New York Attorney General Letitia James, joined by Manhattan District Attorney Alvin Bragg and three other district attorneys, sent an explosive letter to the US Senate. This 14-page document details precisely how the GENIUS Act deliberately omits to require stablecoin issuers to return funds to fraud and theft victims. A legislative gap that prosecutors describe as an explicit invitation to continue fraudulent practices within the stablecoin ecosystem.
Context
Stablecoins, these cryptocurrencies pegged to the US dollar, have become a cornerstone of the global crypto market. With transaction volumes reaching 33 trillion dollars in 2024, a staggering 72% increase in a single year, they represent massive liquidity flowing daily between decentralized platforms, decentralized finance protocols, and traditional finance. Tether (USDT) dominates the market with approximately 62% market share, followed by Circle (USDC) with approximately 28%, leaving other players to share the remaining 10%.
The GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act) was signed with great fanfare by President Trump in July 2025. This law required stablecoin issuers to maintain reserves on a one-to-one basis, in the form of immediate liquidity or short-term US Treasury bills, for the first time. The stated objective was to end the regulatory anarchy that reigned over this market estimated at more than 300 billion dollars in capitalization.
Yet from its adoption, voices rose to denounce the serious shortcomings of this legislation. Illicit transactions involving stablecoins now account for 63% of all illegal activity in cryptocurrencies, according to data compiled by Chainalysis. This alarming proportion illustrates how stablecoins have become the preferred tool for criminal networks to launder proceeds from illegal activities and finance their operations.
The Facts
The prosecutors’ letter, addressed to Senator Chuck Schumer, to Senator Kirsten Gillibrand, Democratic co-sponsor of the GENIUS Act, and to Senator Mark Warner, member of the Banking and Intelligence committees, sets out three main grievances against current legislation.
First grievance: the total absence of provision requiring stablecoin issuers to return funds to victims. The GENIUS Act imposes reserves but contains no clause forcing Tether or Circle to return frozen assets to people who have become victims of scams, hacking, or theft. This absence provides, according to prosecutors, a « legal framework » for companies to retain stolen funds and collect the interest generated by their investment on financial markets.
Second grievance: the ability for issuers to financially thrive on frozen funds. As of November 2025, Circle held more than 114 million dollars in frozen funds in connection with ongoing legal proceedings or investigations. According to calculations by New York prosecutors, both Tether and Circle each generated approximately one billion dollars in profits in 2024 from interest paid on reserves placed in money markets, including those corresponding to stolen and subsequently frozen stablecoins. This situation is perfectly described in the letter: it would be « financially preferable » for Circle to freeze suspected stablecoins without ever returning them to victims, because interest continues to accumulate on the frozen assets.
Third grievance: unequal treatment between American and foreign issuers. Tether, based in El Salvador, is only required to cooperate with US federal authorities and on a case-by-case basis. It recognizes no legal obligation to comply with requests from individual US state authorities. This asymmetry allows Tether to operate in an advantageous legal vacuum, with 60% of the global stablecoin market under its control. Circle, headquartered in New York, would be more cooperative but systematically freezes suspected funds without ever returning them, collecting interest on the frozen assets.
Both companies have denied these allegations. Tether stated: « Tether works voluntarily and closely with US law enforcement at the federal, state, and local levels and routinely assists investigations aimed at protecting victims and preventing further harm. » Circle stated: « Has always prioritized financial integrity and advancing US and global regulatory standards for stablecoins. »
Analysis
Professor Hilary J. Allen, a recognized specialist in banking and cryptocurrency law at American University Washington College of Law, offers a particularly severe assessment of the current US regulatory framework. « Everything that took decades to develop and organize in traditional finance to protect consumers, prosecute criminals, and ensure financial stability simply does not exist in the GENIUS Act, » she stated in an analysis accompanying the letter’s publication.
« The laws were never incompatible with blockchain technology. They were incompatible with the crypto business model based on opacity and exploitation of regulatory loopholes, » added Professor Allen, whose work is regularly cited by Congressional committees. Her position is clear: the GENIUS Act is not a victory for regulation but a capitulation to the sector’s powerful lobbies.
Critics also point out that the GENIUS Act imposes reserves but establishes no obligation to return funds to victims. Unlike traditional banking institutions that must deposit frozen funds with authorities within a specified timeframe, stablecoin issuers operate without this kind of constraint. Prosecutors emphasize that unlike other anonymous or pseudonymous cryptocurrencies, Tether and Circle have the technical ability to immediately freeze suspected stablecoins and stop the flow of illicit funds. Yet neither uses this capability systematically, preferring to generate returns on frozen assets.
The letter to the Senate also details the concrete consequences for victims. For thousands of people scammed in cryptocurrency, stolen funds converted to USDT or USDC will « never be frozen, seized, or returned, » according to the prosecutors’ analysis. This is a fundamental difference from the traditional banking system, where fraud victims can generally expect a blocked bank account and a criminal investigation.
Market and Political Reactions
Since the explosive publication of the New York prosecutors’ letter, political and regulatory reactions have multiplied in Washington. Senator Mark Warner, one of the letter’s recipients, stated: « Stablecoin issuers have a responsibility to comply with lawful court orders under the GENIUS Act and to cooperate fully with authorities to help victims recover stolen funds. Protecting victims is paramount and Congress will continue to evaluate necessary improvements to this legislation. »
On February 27, 2026, Senator Jack Reed, a Democratic member of the Senate Banking Committee, introduced the Foreign Stablecoin Transparency Act (S.3907). This bill aims to close the gap identified by prosecutors by requiring foreign issuers of dollar-pegged stablecoins to meet the same audit and transparency requirements as their American counterparts. Tether, which represents 60% of the global market with more than 180 billion dollars in tokens in circulation, would be directly affected by this legislation if adopted.
On April 8, 2026, FinCEN (Financial Crimes Enforcement Network) and OFAC (Office of Foreign Assets Control) took a further step by jointly publishing a proposed rule requiring stablecoin issuers to comply with the Bank Secrecy Act. This proposal, open to public comment until June 9, 2026, requires mandatory anti-money laundering and counter-terrorism financing programs, as well as an enhanced explicit sanctions regime. This is the first time in American federal law that legislation explicitly mandates a sanctions compliance program for a given type of actor.
The following day, Fed Governor Michael Barr delivered a speech warning of financial stability risks linked to the rapid growth of stablecoins. He compared the situation to the American « free banking » era and the financial panics of the early twentieth century, highlighting the potential inability to redeem at par in the event of extreme market stress. « The risks are real and regulation must evolve rapidly to avoid major financial contagion, » he stated before the audience at the Council on Foreign Relations.
Outlook
Several scenarios are emerging to correct the gaps identified by New York prosecutors. Adoption of the Foreign Stablecoin Transparency Act would represent a concrete first step by imposing transparency on foreign actors. However, the notoriously slow American legislative process and the considerable lobbying power of the crypto sector in Washington mean such an evolution could not occur before 2027 at the earliest.
FinCEN and OFAC’s regulatory proposals could strengthen the existing framework by the end of 2026, but their scope will be limited if the GENIUS Act is not amended to include provisions on returning funds to victims. Senator Reed stated on this subject: « We cannot allow foreign companies to operate without oversight while American victims remain without effective remedy. »
For thousands of stablecoin fraud victims, the current situation remains particularly problematic. The 114 million dollars in frozen funds held by Circle are not intended to be returned. Tether continues to operate without legal obligation to cooperate with US state authorities, which considerably limits the possibilities for judicial action for victims residing outside the American federal circuit.
The public comment period for the FinCEN/OFAC proposal, which closes on June 9, 2026, will represent a key moment for evaluating the future direction of regulation. By then, Congress could also make progress on S.3907. But observers remain cautious: the slow American legislative pace and the considerable resources of the crypto sector make rapid and profound reform of the GENIUS Act in its current state unlikely.
Sources
- Stablecoin law allows crypto firms to profit from fraud, prosecutors say — CNN
- FinCEN and OFAC Propose AML/Sanctions Rules for Stablecoin Issuers Under GENIUS Act — Holland & Knight
- Reed Seeks to Close Alarming Loophole in GENIUS Act — Senator Reed’s Office
- Fed’s Barr highlights stablecoin risks — InfoBytes/Orrick
- New York Prosecutors Slam 2025 Stablecoin Law for Fueling Fraud Profits — Let’s Talk Bitcoin
