New York Prosecutors Blast Stablecoin Law for Enabling Fraud Profits in 2025

New York’s leading legal authorities have launched a fierce attack on a federal stablecoin regulation, accusing it of handing crypto giants a license to profit from stolen funds while victims are left empty-handed. Attorney General Letitia James and Manhattan District Attorney Alvin Bragg have zeroed in on the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, signed into law by President Trump in July 2025, for its glaring failure to protect cryptocurrency investors or mandate the return of illicit assets amid a staggering 162% surge in crypto crime.

• Major Flaw: GENIUS Act lacks rules to force stablecoin issuers to return stolen funds, fueling fraud profits.
• Prime Targets: Tether (USDT) and Circle (USDC) slammed for earning interest on frozen, illicit reserves.
• Crime Explosion: Illicit crypto transactions soared to $154 billion in 2025, with stablecoins as the top criminal tool.

What Is the GENIUS Act, and Why the Outrage?

The GENIUS Act was pitched as a groundbreaking move to bring order to the stablecoin market—digital currencies pegged to fiat like the U.S. dollar, designed to offer a steady value in the chaotic crypto world. Under this 2025 legislation, issuers must back their tokens with secure assets like cash or Treasury bills to avoid repeats of catastrophic failures like TerraUSD, which wiped out $40 billion in investor wealth in 2022 when its algorithmic peg collapsed. For the uninitiated, stablecoins act like digital dollars in the crypto ecosystem, making them vital for everything from trading on decentralized finance (DeFi) platforms to sending remittances without wild price swings. But James and Bragg aren’t buying the hype. In a blistering letter to Congress, they’ve called the law a “gift” to crypto firms that are effectively profiting from fraud by exploiting a massive loophole: there’s no requirement to return stolen or illicit funds to victims, even when those assets are identified and locked down in digital wallets.

The Dark Side of Stablecoin Profits

Here’s where it gets ugly. Stablecoin issuers like Tether, behind USDT, and Circle, which runs USDC, hold vast reserves to maintain their tokens’ 1:1 peg with the dollar. Think of these reserves as a giant savings account—money or investments like bonds that generate interest, padding the companies’ bottom lines. In 2024, these two titans reportedly hauled in a cool $1 billion in profits from interest alone. The catch? A portion of those reserves includes funds tied to hacks, scams, and outright theft. Circle is allegedly sitting on over $114 million in frozen funds as of November 2025, raking in interest on money that belongs to victims of cybercrime. Tether, no stranger to controversy, froze $182 million across five wallets on the Tron blockchain—a network known for cheap, fast transactions often exploited by both legit users and crooks—on January 11, 2026. Yet, they’ve shrugged off responsibility, claiming they’re only bound by federal orders, not state-level demands. In other words, they’ll lock the funds, but don’t hold your breath for a refund unless Uncle Sam twists their arm.

“The GENIUS law is a ‘gift’ to crypto companies that are effectively ‘profiting from fraud.’” – Letitia James and Alvin Bragg

Crypto Crime Surge: Stablecoins as Criminals’ Go-To Tool in 2025

The prosecutors’ outrage isn’t just about corporate greed; it’s fueled by a runaway epidemic of crypto-related crime. The 2026 Crypto Crime Report by Chainalysis, a blockchain analytics firm, paints a grim picture: illicit addresses received a record-breaking $154 billion in 2025, a jaw-dropping 162% increase from the year before. Stablecoins, with their stability and ease of transfer, have become the preferred rail for criminals. Picture them as the digital equivalent of a suitcase full of untraceable cash, but with instant global reach. From “pig butchering” scams—where fraudsters pose as romantic interests to lure victims into fake investments, only to vanish with their money—to outright theft, stablecoins are the lubricant of modern cybercrime.

Even nation-states are in on the game. Russia rolled out a ruble-backed token called A7A5 in February 2025 to sidestep international sanctions, processing a staggering $93 billion in under a year. North Korea, always a heavyweight in the hacking arena, allegedly used stablecoins to launder $2 billion stolen in 2025, including $1.5 billion from a brutal hack on the Bybit exchange, a major crypto trading platform. For those new to the space, such hacks often exploit security gaps in exchanges, leaving users and regulators playing catch-up while funds disappear into the blockchain abyss.

New York’s Fight: Scams Hit Close to Home

Back in New York, the underbelly of crypto innovation is striking hard. A 23-year-old was recently indicted in Brooklyn for a $16 million con that leveraged AI to impersonate Coinbase employees, using deepfake voices and spoofed emails so polished you’d think you were chatting with legit support. The Chainalysis report flags that AI-enabled scams were 4.5 times more lucrative than old-school tricks in 2025, showing how tech is supercharging fraud just as fast as it’s driving decentralization. For James and Bragg, this isn’t abstract—it’s personal. New York, a hub of financial ingenuity, is also a magnet for financial grift. Their letter, directed to power players like Senator Chuck Schumer, demands urgent legislative fixes to stop firms from hoarding interest on stolen funds indefinitely. Senator Mark Warner’s office signaled agreement, noting the need to prioritize victim protection with actions like those outlined by New York prosecutors targeting stablecoin firms.

“Protecting victims is ‘paramount’ and Congress is evaluating if more laws are needed to make sure stolen funds are returned quickly.” – Senator Mark Warner’s office

Devil’s Advocate: Are Stablecoin Issuers Really the Villains?

Let’s take a step back and play devil’s advocate. Stablecoin issuers aren’t necessarily cartoonish villains twirling their mustaches over piles of stolen loot. Managing billions in assets across global jurisdictions is a logistical nightmare, and returning funds often involves untangling legal knots in countries with zero crypto oversight. Tether, despite its laundry list of past sins—including a 2021 settlement with James’ office over fudged reserve claims—has pointed out that freezing suspicious wallets is a step in the right direction. Circle, often seen as the more compliant kid on the block, emphasizes its alignment with U.S. standards. But here’s the rub: without a hard legal mandate for restitution, there’s no real push to prioritize victims over profits. Why fork over millions when you can let the interest tick up? It’s a harsh reality for an industry that claims to upend traditional finance, yet echoes its worst habits.

Bitcoin’s Stake in the Stablecoin Mess

As Bitcoin advocates, we often champion BTC as the pinnacle of decentralized freedom—untouched by corporate overreach or central bank meddling. But let’s not delude ourselves: the stablecoin scandal could splatter mud all over Bitcoin’s image if the masses start viewing crypto as one giant scam haven. High-profile crimes, like North Korea’s $2 billion laundry scheme, might spook regulators into clamping down on Bitcoin harder than ever, tainting the entire blockchain narrative. On the flip side, this chaos could steer users toward BTC as a ‘purer’ alternative—a store of value free from shady reserves or middlemen. Yet, are we Bitcoin maximalists blind to stablecoin utility just to push a purist agenda? Bitcoin isn’t cut out for quick, stable trades or fueling DeFi liquidity, which is like the lifeblood of decentralized trading platforms. Stablecoins like USDT and USDC bridge that gap, powering ecosystems on Ethereum and beyond. Crush them with heavy-handed rules, and you risk gutting the financial revolution we’re rooting for. The real challenge is accountability without strangulation—a balancing act even the sharpest minds in crypto might fumble.

The Path Forward: Innovation vs. Accountability

Despite its flaws, the GENIUS Act isn’t pure trash. It’s a tentative step toward taming the wild west of stablecoins, which even decentralization diehards must admit is needed to avoid alienating the mainstream adoption we’re chasing. Stablecoins serve niches Bitcoin doesn’t touch, acting as a gateway between fiat and digital economies. Without them, much of the crypto ecosystem—think Ethereum’s DeFi protocols or cross-border payments—would grind to a halt. Upcoming talks at the White House Crypto Council, involving heavyweights from Coinbase, Ripple, and the American Bankers Association, will wrestle with sticky issues like “stablecoin rewards” and interest payments, currently off-limits under the Act. If they can craft a framework that holds firms accountable without bowing to corporate pressure, we might get a win for both innovation and victims.

Still, the raw data is a slap in the face to any rosy crypto narrative. For every tale of blockchain empowerment, there’s someone who’s lost everything to a pig butchering swindle or a rug pull—where shady projects vanish overnight with investor cash. As proponents of freedom and privacy, we must confront how those ideals can be twisted by bad actors. Pushing rapid tech adoption to overhaul broken systems only works if we face the wreckage head-on. James and Bragg are dead right to call out this unforgivable loophole, and Congress needs to act before another $154 billion slips into the void.

For everyday users caught in this mess, a word of caution: protect yourself. Steer clear of unsolicited investment pitches, double-check any platform or person claiming to represent exchanges like Coinbase, and consider hardware wallets—secure devices that keep your crypto offline—to shield your funds from digital bandits. The promise of crypto is real, but so are the predators.

Key Takeaways and Questions on Stablecoin Fraud and Regulation

• What’s the GENIUS Act, and why are New York prosecutors furious about it?
  It’s a 2025 federal law signed by President Trump to regulate stablecoins with safe asset backing, but Letitia James and Alvin Bragg condemn it for lacking mandates to return stolen funds, allowing firms to profit from fraud.
• How do stablecoin issuers like Tether and Circle profit from illicit funds?
  They earn substantial returns on interest from reserves, including frozen funds tied to hacks and scams, netting $1 billion in 2024 while holding millions in stolen assets without restitution.
• How severe is the crypto crime wave, and why are stablecoins central to it?
  Illicit transactions reached $154 billion in 2025, up 162% per Chainalysis, with stablecoins favored by criminals for their stability and ease, fueling scams and sanctions evasion.
• How are nation-states exploiting stablecoins for shady purposes?
  Russia’s A7A5 token processed $93 billion to dodge sanctions, while North Korea laundered $2 billion, including $1.5 billion from the Bybit hack, using stablecoins in 2025.
• What actions are underway to tackle these stablecoin issues?
  Prosecutors are urging Congress to enforce restitution laws, and the White House Crypto Council will discuss interest payment policies with industry leaders from Coinbase and Ripple.
• Why does the lack of restitution matter for crypto’s future?
  Without it, victims have no recovery path, eroding trust in crypto; balancing accountability with innovation is crucial to legitimize the space and sustain adoption.
• How does this impact Bitcoin and the broader decentralization movement?
  Stablecoin crime risks tarnishing Bitcoin’s image, potentially tightening regulations, though it could also push users to BTC as a safer alternative; stablecoins’ utility in DeFi can’t be ignored despite the mess.