NY Prosecutors Allege GENIUS Act Provides 'Legal Cover' for Fraud
New York Attorney General Letitia James and four district attorneys have formally warned that the federal GENIUS Act for stablecoins is dangerously inadequate for preventing fraud. In a letter reported by CNN, the officials claim the law will "provide legal cover" for stablecoin issuers to enable illicit financial activities. The prosecutors argue that the current structure incentivizes issuers to avoid working with law enforcement, allowing them to profit from crimes involving their tokens.
The letter singles out the two largest stablecoin issuers, Tether and Circle. It accuses Tether of operating on a "case-by-case basis" when assisting law enforcement, leading to a grim reality for victims. "The reality for many victims, therefore, is that funds stolen in or converted to USDT will never be frozen, seized, or returned," the letter stated. The officials also criticized Circle, asserting that despite its claims to be an ally against fraud, its policies were "significantly worse than those of Tether for victims of fraud."
Tether and Circle Defend Divergent Compliance Stances
Tether responded by stating it maintains a "zero-tolerance policy toward illicit activity" but clarified its legal position. Headquartered in El Salvador, the company noted it does not have "a blanket legal obligation to comply with state-level civil or criminal processes in the way a US-regulated financial institution would." This stance creates a clear distinction between its international operations and the expectations of U.S. state prosecutors.
In contrast, Circle's Chief Strategy Officer, Dante Disparte, defended both his company and the new law. He emphasized that Circle has always prioritized financial integrity as a "US regulated financial institution" and will continue to adhere to prevailing rules. Disparte added that the GENIUS Act "makes clear that stablecoin issuers must abide by applicable financial integrity rules for combating illicit activity," suggesting the framework enhances, rather than weakens, regulatory standards.
State vs. Federal Regulation Battle Intensifies
The public criticism from powerful New York law enforcement officials signals a brewing conflict between state authorities and the new federal regulatory regime established by the GENIUS Act, which was signed into law in July. This clash creates significant regulatory uncertainty for the stablecoin market, a critical source of liquidity for the entire cryptocurrency ecosystem. The dispute underscores the deep divisions over how to police digital assets effectively.
The issue is further intensified by New York's political landscape. Attorney General James, a prominent critic of the crypto industry, may face a challenge in the 2026 election from Khurram Dara, a former Coinbase policy lawyer who has accused her of engaging in "lawfare" against the sector. This potential matchup highlights the growing political stakes tied to cryptocurrency regulation.
