Crypto Stablecoin Law Faces Pushback As New York Prosecutors Target Tether, Circle

New York's legal hammer swings at stablecoin giants—just as regulators try to write the rulebook.

The Regulatory Squeeze

Prosecutors aren't waiting for legislation to dry. Tether and Circle find themselves in the crosshairs of state-level enforcement, a move that could kneecap efforts to craft clear federal stablecoin laws. The message? Play by our rules, even before they're fully written.

Why This Fight Matters

Stablecoins are the plumbing of crypto—they're supposed to be the safe, boring part. When that foundation gets shaky, everything built on top wobbles. This legal pushback isn't just about two companies; it's a power struggle over who controls the future of digital dollars.

Market Jitters and Silver Linings

Short-term pain for long-term gain—that's the crypto mantra. Scrutiny now could force the transparency the industry claims to want. Of course, that's the same line used to sell every painful 'correction' since the first tulip bulb futures contract.

The Bottom Line

Regulation was always coming. The question was whether it would be built with the industry or against it. New York's aggressive stance suggests prosecutors prefer the latter approach—creating rules by enforcement rather than collaboration. Buckle up; the stablecoin wars have just begun.

Alleged Regulatory Gaps In Crypto Law 

According to a report from CNN, James joined four district attorneys, including Manhattan District Attorney Alvin Bragg, in warning lawmakers that the GENIUS Act fails to adequately protect victims of financial crime. 

In a letter to Congress, the prosecutors argue that the law gives what they describe as an “imprimatur of legitimacy” to stablecoins, while allowing issuing companies to sidestep critical regulatory obligations needed to combat terrorism financing, drug trafficking, money laundering, and, in particular, cryptocurrency fraud.

A central concern for the prosecutors is not what the GENIUS Act includes, but what it leaves out. They argue that the law does not require stablecoin issuers to return stolen funds to victims of fraud. This omission, they say, risks encouraging harmful behavior. 

In their view, the lack of a clear legal obligation could embolden stablecoin companies to retain stolen assets rather than cooperate fully with law enforcement efforts to make victims whole. The prosecutors warned that this gap may effectively provide legal cover for firms that choose to keep control of stolen funds.

Tether Rejects Allegations

The letter singles out the two largest stablecoin issuers, Tether (USDT) and Circle (USDC), claiming both have hindered efforts to seize and return illicit funds, while continuing to profit from activity that prosecutors say remains widespread in stablecoin markets. 

The prosecutors allege that the company has used this power inconsistently and primarily in coordination with federal law enforcement, rather than in response to state or local actions.

As a result, they argue, many victims have little chance of recovering stolen funds once assets are converted into USDT. The letter states that funds moved into USDT are often never frozen, seized, or returned, and that Tether currently decides on a case‑by‑case basis whether to assist in recovery efforts.

Tether responded to CNN by strongly rejecting the suggestion that it tolerates illicit activity. The company said it takes fraud, consumer harm, and misuse of USDT extremely seriously and maintains a zero‑tolerance policy toward criminal behavior. 

Circle Faces Sharper Scrutiny

The prosecutors’ criticism of Circle, the second‑largest stablecoin issuer, is even sharper. Circle is publicly traded and based in New York, and the letter acknowledges that the company presents itself as a partner in the fight against financial crime. 

However, the prosecutors argue that Circle’s policies are “significantly worse than those of Tether” when it comes to helping victims recover stolen funds.

They allege that even when Circle agrees to freeze assets linked to fraud, it typically retains control of those funds rather than returning them to victims or law enforcement. 

By holding the underlying reserves, the prosecutors say, Circle continues to earn interest, creating what they describe as a “crystal clear” financial incentive to delay or deny fund returns. 

Circle pushed back against these claims in a statement to CNN. Dante Disparte, the company’s chief strategy officer, said Circle has consistently prioritized financial integrity and the advancement of strong regulatory standards in the US and globally. 

He argued that the crypto law clearly requires stablecoin issuers to follow applicable rules to combat illicit activity while also strengthening consumer protections. 

Featured image from OpenArt, chart from TradingView.com