Prosecutors Warn New Crypto Law Enables Fraudulent Stablecoin Operations
New York's top prosecutors have issued a stark warning about the state's groundbreaking cryptocurrency legislation, arguing that the GENIUS Act provides legal cover to crypto firms while failing to protect victims of fraud. In a letter obtained by CNN, New York Attorney General Letitia James and Manhattan District Attorney Alvin Bragg, alongside three other district attorneys, contend that the law effectively legitimizes stablecoin issuers while allowing them to skirt crucial regulatory requirements designed to combat financial crimes.
Background and Context
The GENIUS Act, hailed as the cryptocurrency industry's first major legislative milestone in New York, was designed to create a regulatory framework for stablecoins—digital currencies pegged to traditional assets like the US dollar. However, prosecutors argue the law contains significant loopholes that enable crypto companies to profit from fraudulent activities. Stablecoins have become increasingly important in the digital asset ecosystem, serving as a bridge between traditional finance and cryptocurrency markets, but their rapid growth has outpaced regulatory oversight.
Key Figures and Entities
The letter was spearheaded by New York Attorney General Letitia James, who has previously taken action against major cryptocurrency platforms for investor protection violations. Manhattan District Attorney Alvin Bragg joined the effort, bringing his office's expertise in financial crimes and white-collar prosecution. The prosecutors collectively represent jurisdictions that have seen significant cryptocurrency-related fraud cases, giving them firsthand insight into the challenges of enforcing existing laws against crypto-based financial crimes. Their joint action signals rare bipartisan agreement on the need for stronger crypto regulation.
Legal and Financial Mechanisms
According to the prosecutors' assessment, the GENIUS Act creates what they term an "imprimatur of legitimacy" for stablecoin operations while failing to implement adequate safeguards. The law allegedly allows issuers to avoid comprehensive oversight mechanisms that would typically cover traditional financial institutions. These gaps potentially facilitate money laundering, terrorist financing, drug trafficking proceeds, and various forms of cryptocurrency fraud. The prosecutors emphasize that unlike regulated banks, stablecoin issuers under the GENIUS Act framework operate with minimal transparency requirements regarding their reserves and transaction monitoring systems.
International Implications and Policy Response
The prosecutors' warning comes as global regulators grapple with how to oversee the rapidly expanding stablecoin market, which now represents hundreds of billions in circulating supply. The Financial Stability Oversight Council has previously identified stablecoins as potential systemic risks, while the European Union is implementing its own comprehensive crypto regulatory framework through the Markets in Crypto-Assets regulation. The New York prosecutors' letter adds to growing pressure on lawmakers to strengthen crypto oversight rather than create regulatory havens that might attract illicit financial flows. Their intervention could influence how other states and federal authorities approach crypto legislation, potentially setting a precedent for more rigorous enforcement priorities.
Sources
This report is based on the letter from New York state prosecutors obtained by CNN, public statements from the New York Attorney General's office, and prior reporting on cryptocurrency regulation and stablecoin oversight mechanisms in major financial publications between 2022 and 2024.
