Prosecutors Warn New Federal Crypto Law May Backfire
A coalition of New York state prosecutors, including Attorney General Letitia James and Manhattan District Attorney Alvin Bragg, has voiced a stark warning about the new GENIUS Act, the first major federal legislation governing stablecoins and certain digital assets. They argue the law’s structure, while intended to bring clarity and oversight to crypto markets, may inadvertently shield bad actors and enable fraud rather than prevent it.
In a letter obtained by major news outlets, the prosecutors contend that the law gives stablecoin issuers a form of legitimacy without imposing strong consumer protections or anti-fraud mechanisms that would ensure victims of crypto scams can recover stolen funds. They highlight concerns that certain issuers could benefit financially from frozen or disputed assets while victims struggle to get their money back.
What the Prosecutors Are Saying
According to the letter, the GENIUS Act’s current framework may:
Allow stablecoin issuers to hold and even profit from frozen assets tied to fraud, rather than returning them to victims.
Enable companies to sidestep more stringent regulatory requirements around anti-money laundering (AML) and fraud prevention.
Make it harder, not easier, for law enforcement to seize and repatriate stolen funds.
Prosecutors specifically pointed to major stablecoin issuers, including providers of widely used dollar-pegged tokens, asserting that under the new legal regime, those firms could resist law enforcement efforts and delay or block restitution for victims of scams or theft.
The Regulatory Context
The GENIUS Act, passed with significant bipartisan support, was designed to establish a regulatory framework for stablecoins, requiring issuers to maintain reserves and meet certain transparency standards. Supporters in Congress pitched the law as a breakthrough in bringing digital assets into the financial mainstream, with provisions aimed at protecting consumers and stabilizing the market.
However, the new objections from New York’s top prosecutors highlight the tension between legal recognition of a burgeoning asset class and ensuring robust safeguards against misuse. This debate strikes at the heart of how the United States chooses to balance innovation and enforcement amid rapidly evolving crypto markets.
What This Means for Crypto Enforcement
If the concerns raised by New York prosecutors gain traction, they could influence how regulators and courts interpret the GENIUS Act down the line. Prosecutors emphasize that law enforcement needs clear authority to:
Freeze and reclaim funds tied to fraud, money laundering, and terrorism financing.
Force issuers to cooperate in investigations rather than treat compliant behavior as optional.
Ensure stablecoin frameworks don’t unintentionally create safe harbors for illicit activity.
Their position also underscores ongoing state-level resistance to crypto laws that might weaken local enforcement powers or diminish consumer protections.
The Broader Debate
This controversy isn’t isolated. In recent years, New York officials have been at the forefront of high-profile crypto enforcement actions, ranging from massive settlements with bankrupt lenders to lawsuits alleging multi-billion-dollar fraud schemes.
Now, with new federal frameworks emerging, the conversation has shifted to whether legislation strikes the right balance, offering regulatory clarity without undermining law enforcement’s ability to protect everyday investors.
What Investors and Users Should Know
For market participants, this debate has tangible implications:
Stablecoin users should be aware of unresolved questions around fraud liability and asset recovery.
Developers and issuers might face conflicting interpretations between state prosecutors and federal regulators.
Policymakers are watching closely as public sentiment and enforcement priorities could shape future amendments to crypto law.
In a fast-moving environment, legal clarity and enforcement tools are often as important as technological innovation itself.
