Stablecoin Regulation Allows Crypto Firms to Profit from Fraud

• New York prosecutors warn the GENIUS Act could allow stablecoin issuers to profit from frozen stolen funds without returning them to victims according to prosecutors.
• Tether and Circle, major stablecoin issuers, have been accused of selectively freezing transactions and benefiting from interest on frozen assets.
• Prosecutors estimate Tether and Circle each earned $1 billion in 2024 from such practices and warn the law lacks restitution mandates for fraud victims.

New York prosecutors have raised serious concerns about the GENIUS Act, a law enacted in July 2025 to regulate stablecoins. While the law mandates that stablecoin issuers maintain one-to-one reserves with cash or short-term Treasuries, it has been criticized for failing to include requirements for returning stolen funds to victims according to prosecutors. Prosecutors argue this omission creates a financial incentive for companies to retain control over frozen assets, enabling them to profit from interest while victims are left without recourse.

Tether and Circle, two of the largest stablecoin issuers, have been specifically targeted by prosecutors for their handling of frozen assets. Tether freezes USDT transactions only selectively and typically at the request of federal law enforcement, while Circle retains frozen funds and earns interest from them. Prosecutors claim this strategy undermines the law's intent and creates a financial motive for inaction.

The issue of restitution for fraud victims has been a major point of contention. Prosecutors highlight that the law grants legitimacy to stablecoin firms without imposing necessary safeguards against fraud and money laundering. The absence of restitution provisions, they argue, allows companies like Tether and Circle to profit from criminal activities while limiting victim recovery.

The lack of restitution mechanisms has sparked a broader debate about the role of stablecoins in illicit transactions. Prosecutors warn that the law's failure to mandate restitution could lead to the exploitation of stablecoins for fraud.

Do Restitution Protections Exist for Stablecoin Victims?

The GENIUS Act does not include provisions that require stablecoin issuers to return stolen or frozen funds to victims, a significant gap in the law. Prosecutors argue this omission emboldens firms to resist law enforcement efforts to recover stolen assets. Victims are left without legal recourse when companies like Tether and Circle choose not to return stolen funds, creating a situation where fraud victims are not adequately protected.

The lack of restitution mechanisms has sparked a broader debate about the role of stablecoins in illicit transactions. Prosecutors warn that the law's failure to mandate restitution could lead to the exploitation of stablecoins for fraud.

How Do Stablecoin Issuers Benefit from Frozen Assets?

Tether and Circle have both been accused of profiting from frozen assets tied to stolen funds. Tether freezes transactions selectively, often in cooperation with federal authorities, while Circle retains control over frozen funds and earns interest from them. Prosecutors claim this selective freezing creates a financial incentive for inaction.

Circle's strategy, according to prosecutors, involves holding onto frozen assets rather than returning them. This approach has led to accusations that the company is prioritizing financial gain over victim recovery. Tether, on the other hand, has stated it takes fraud and misuse of USDT seriously and enforces a zero-tolerance policy for illegal activity.

What Are the Implications for the Stablecoin Market?

The debate over the GENIUS Act underscores growing concerns about the role of stablecoins in the broader crypto market. Prosecutors warn that without adequate consumer protections, stablecoins could be increasingly used for illicit transactions, undermining their legitimacy and exposing users to systemic risk. The issue of restitution for fraud victims has become a critical point of discussion, with prosecutors urging further legislative action to address the shortcomings of the current framework.

The next major step in this regulatory process will be the FDIC's proposed rules for stablecoin issuer licensing. These rules will define the practical application of the GENIUS Act's framework and determine whether issuers are required to cooperate with law enforcement. Without clear mandates, the licensing process risks becoming a rubber stamp, leaving the fraud gap unaddressed.

The debate over the GENIUS Act highlights the need for stronger consumer protections and clearer restitution requirements in the stablecoin market. Prosecutors argue that without these measures, stablecoin issuers like Tether and Circle can continue to profit from frozen assets while limiting victim recovery. The outcome of this debate will have significant implications for the future of stablecoin regulation and the broader crypto industry.