Federal Law Shields Tether and Circle, Claims Joint Letter
New York Attorney General Letitia James and Manhattan District Attorney Alvin Bragg issued a blistering critique of federal crypto regulation today, warning that the GENIUS Act has created a safe harbor for financial crime. In a joint letter to Congressional leaders, the prosecutors argue the law, enacted in July 2025, legitimizes stablecoin issuers while allowing them to profit from illicit activity.
The core allegation is precise. While the GENIUS Act mandates 1:1 reserve backing for tokens like USDT ($0.99) and USDC ($1.00), it fails to require the return of stolen funds to victims. Prosecutors claim this regulatory gap allows issuers to freeze assets linked to fraud, terrorism, or laundering, and then indefinitely collect interest on the backing reserves.
The legislation provides legal cover for stablecoin issuers to profit from fraud… [creating] a financial incentive to resist helping victims.
The “Profit-from-Crime” Loophole
James and Bragg specifically named industry giants Tether and Circle in the correspondence. They accused both firms of “poor cooperation” with state law enforcement and detailed how the companies benefit from the bureaucratic limbo of frozen assets. By holding the Treasury bills backing frozen stablecoins, issuers earn yield, currently hovering near 4-5%, on money that belongs to fraud victims.
Under the GENIUS Act (Public Law 119-27), federal preemption largely strips states like New York of their ability to enforce stricter restitution mandates. The prosecutors contend this federal override has stripped consumer protections rather than enhancing them. The letter demands immediate legislative amendments to force automatic restitution of frozen assets.
Market Reaction: Indifference
The market shrugged off the regulatory heat. Tether (USDT) held firm at $0.999, and Circle (USDC) maintained its $1.00 peg. Volume remains consistent across major pairs. Traders appear to view this as a political friction between New York’s aggressive enforcement regime and the new federal standard, rather than an existential threat to stablecoin liquidity.
This conflict signals a deepening rift between state prosecutors and federal lawmakers. While the GENIUS Act was designed to cement the U.S. dollar’s dominance via stablecoins, New York officials are signaling they will aggressively interpret any remaining state statutes to penalize issuers who prioritize yield over victim restitution.
