TL;DR
- New York prosecutors warned Congress that the GENIUS Act lacks obligations requiring issuers to return stolen stablecoins.
- The letter pointed to Tether and Circle, stating that USDT is frozen selectively and that USDC retains frozen funds and generates yields without returning them.
- The GENIUS Act framework requires liquid reserves but does not compel cooperation with state orders or the transfer of seized funds to victims.
New York prosecutors questioned the legal framework of the GENIUS Act, the federal stablecoin law signed in July by President Donald Trump. The warning stems from a letter sent to Congress and signed by Attorney General Letitia James and four district attorneys, including Manhattan District Attorney Alvin Bragg.
The document states that the law does not incorporate clear obligations for the restitution of stolen funds in cases of stablecoin-related fraud. Prosecutors argue that this omission allows issuers to keep frozen assets under their control without returning them to victims, even when criminal investigations are ongoing.
The letter directly mentions Tether and Circle, the two largest issuers of dollar-pegged stablecoins. According to prosecutors, Tether has the technical ability to freeze USDT transactions but applies that authority selectively and, in practice, only in coordination with federal agencies. The text states that funds stolen or converted into USDT are often neither frozen nor recovered.
A Legal Gap in Stablecoin Regulation
In Circle’s case, prosecutors say the company maintains policies that are less favorable to victims. The document states that even when Circle freezes funds, the company retains the assets and generates financial returns from the underlying reserves, without transferring them to victims or authorities.
The GENIUS Act establishes reserve requirements for stablecoin issuers, requiring each token to be backed by liquid assets such as U.S. dollars or short-term Treasury securities. The law sets an implementation deadline of 18 months from enactment or 120 days after federal regulators issue the corresponding rules.
Prosecutors argue that the law does not include mechanisms that require issuers to comply with state orders or to return stolen funds. The letter states that this legal structure allows companies to retain frozen assets indefinitely.
Tether and Circle Respond
Tether said the company applies a zero-tolerance policy toward the illicit use of USDT and cooperates with law enforcement agencies, while clarifying that it is not subject to the same obligations as a U.S.-regulated financial institution. Circle said it complies with existing financial integrity standards and that the GENIUS Act strengthens the regulatory framework applicable to stablecoins.
The letter was addressed to Senators Chuck Schumer, Kirsten Gillibrand, and Mark Warner. As of now, the Department of Justice has not issued additional comments on the contents of the document.
