NY Prosecutors Torch ‘GENIUS Act’; Claim Tether & Circle Pocket $1B from Frozen Reserves

New York Attorney General Letitia James and Manhattan District Attorney Alvin Bragg have launched a coordinated attack on the GENIUS Act, accusing the Trump-era stablecoin legislation of providing “legal cover” for systemic fraud. In a joint letter to Congress sent Monday, the prosecutors allege that stablecoin issuers, specifically Tether (USDT) and Circle (USDC), are incentivized to ignore law enforcement requests to preserve their profit margins.

The $1 Billion Incentive

The core allegation is financial, not technical. Prosecutors estimate that in 2024, Tether and Circle each generated approximately $1 billion in profit solely from the yield on reserve assets. Crucially, James claims a portion of this yield is derived from backing funds tied to stolen or frozen tokens.

According to the letter, when issuers freeze stablecoins linked to hacks or sanctions, they often retain the underlying fiat collateral in interest-bearing treasuries rather than returning it to victims. This creates a perverse incentive structure:

The financial incentive to reject law enforcement requests is crystal clear. Issuers continue to collect interest on the underlying funds of frozen assets, effectively profiting from the crimes they are meant to police.

The Compliance Gap: Circle vs. Tether

The letter highlights a stark divergence in enforcement behavior, challenging the industry narrative that US-domiciled Circle is the more compliant entity. Prosecutors explicitly accused Circle of “actively resisting” seizure requests to protect its bottom line.

Data cited in supporting reports paints a grim picture of this resistance. Between 2023 and 2025, Tether froze $3.3 billion in USDT across 7,268 wallets, largely on the Tron network. In contrast, Circle froze just $109 million in USDC. While Tether employs a “freeze and burn” mechanism to reissue assets to victims, Circle reportedly acts only on strict court orders, leaving funds in limbo, and earning yield, for longer durations.

Institutional Context

This offensive represents the first major legal challenge to the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, signed by President Trump in July 2025. The Act was hailed by the industry for establishing 100% reserve requirements and legitimizing stablecoins as payment instruments.

However, NY prosecutors argue the federal preemption embedded in the Act handcuffs state-level enforcement. By prioritizing issuer solvency over victim restitution, the GENIUS Act has effectively created a federal shield for issuers to hoard the yield on illicit billions. With over $28 billion in illicit funds moving through exchanges in the last two years, the scale of this “yield farming on crime” has become a priority target for state regulators.