Examples of weaknesses in the GENIUS Stablecoin project regarding fraud regulation

In early 2025, the U.S. legislative proposal GENIUS to regulate stablecoins faced strong objections from high-ranking New York officials. Attorney General Letitia James and Manhattan District Attorney Alvin Bragg formally criticized the bill, pointing out that it would contain critical deficiencies in combating illicit activities. Their arguments revealed examples of fundamental weaknesses that could undermine consumer protection in the emerging digital asset market, which has a capitalization of trillions of dollars.

What the GENIUS bill aims to achieve

The U.S. Economic Innovation Generation for Stablecoins Act (GENIUS) represents the federal government’s first serious attempt to establish a unified regulatory framework for payment stablecoins. These digital assets, typically backed by U.S. dollars or similar assets, have transformed the infrastructure of cryptocurrency trading and decentralized finance (DeFi).

The bill sets specific provisions regarding: regulatory oversight between state and federal authorities, reserve requirements backing circulating money, redemption policies for users, and licensing standards for authorized issuers. Advocates argue that this legislation would provide the regulatory certainty needed for traditional financial institutions to confidently adopt blockchain technologies.

Examples of weaknesses identified by prosecutors

New York judicial officials were explicit in detailing concrete cases where the current language of GENIUS could be counterproductive. Their analysis revealed three main categories of vulnerabilities:

First weakness: implicit legal immunity for issuers

Prosecutors argued that certain paragraphs of the proposal could be interpreted as granting legal immunity to stablecoin operators. Specifically, provisions on “good faith compliance” and “operational safeguards” contain ambiguous language that could allow issuers to evade criminal liability in cases where their platforms facilitated scams or money laundering. This de facto immunity could protect companies that, despite claiming “zero tolerance” policies, do not implement sufficient verification mechanisms in actual operations.

Second weakness: lack of uniform recovery protocols for victims

A concrete example was the analysis of Tether (USDT). Prosecutors documented that while Tether selectively freezes suspicious wallets—an apparently proactive measure—victims of fraud face enormous obstacles in recovering funds. The GENIUS bill does not require uniform reimbursement or compensation procedures. This allows each issuer to establish its own protocols, creating regulatory inconsistency. When a user falls victim to phishing or credential theft on a platform using USDT, there is no guarantee they can recover their money even after the operator identifies the illicit transaction.

Third weakness: insufficient cooperation with global authorities

The analysis of Circle (USDC) revealed another example of weaknesses. Although Circle publicly positions itself as a “regulatory partner,” its internal policies for victim protection are less robust than it claims. The GENIUS bill, in its current form, does not mandate minimum standards for real-time cooperation with international law enforcement agencies. This means a stablecoin operator could delay or hinder information sharing with investigators in different jurisdictions, complicating transnational crime enforcement.

Comparative table: legislative objectives versus identified risks

Industry response to GENIUS

Circle and Tether, the two largest stablecoin issuers globally, responded strongly to these accusations. A Circle spokesperson stated that GENIUS actually “significantly raises” AML and consumer protection standards compared to the fragmented state-level regulations currently in place. According to Circle, the law would create a more solid and predictable regulatory foundation, benefiting both users and responsible issuers.

Tether reaffirmed its “zero tolerance” policy toward illegal activities and highlighted years of cooperation with law enforcement agencies across multiple countries. The company argues that its selective freezing processes and reporting to authorities demonstrate strict compliance, and that the GENIUS project explicitly recognizes these efforts.

However, the debate remains heated. Industry analysts note that the issuers’ responses sound more like corporate defense than acknowledgment of the documented weaknesses.

How GENIUS compares to international regulatory frameworks

While the U.S. debates GENIUS, Europe has already implemented a more restrictive approach. The Markets in Crypto-Assets Regulation (MiCA), approved by the European Union, imposes much stricter requirements:

• Significantly higher minimum capital requirements
• Segregated custody of reserves with mandatory independent audits
• Explicit compensation rights for users in insolvency cases
• Operational authorization can be denied if cybersecurity standards are not met

International observers have noted that MiCA, although more restrictive, minimizes the very weaknesses that New York prosecutors now highlight in GENIUS. This creates uncomfortable comparisons for U.S. lawmakers: while Europe adopts caution regarding systemic risks, is the U.S. creating a weaker framework than its allies?

Fundamental tensions: innovation versus security

The controversy around GENIUS reflects an irreconcilable tension in digital asset regulation policy. Lawmakers must balance three competing objectives:

1. Foster technological innovation to keep the U.S. as a global leader in digital finance
2. Implement unequivocal protections against fraud, money laundering, and asset theft
3. Create regulatory certainty to attract institutional investment without stifling growth

The documented weaknesses presented by prosecutors suggest that, in its current version, GENIUS might sacrifice the second goal to achieve the first two. Fintech regulation expert Dr. Sarah Bloom commented, “The devil is in the details: vague language on immunity creates legal gaps that defense attorneys will exploit for years. Effective regulation must clearly specify issuer obligations during fraudulent events.”

What’s next for the GENIUS project?

The bill faces pressure to be amended before advancing in Congress. The formal comments from Letitia James and Alvin Bragg go beyond mere criticism: they constitute official warnings that, without substantial changes, the law could set problematic legal precedents.

Lawmakers have the opportunity to revise critical provisions, especially those that reveal weaknesses in issuer responsibility. However, they also face industry pressure to keep the framework flexible to prevent innovation from migrating to more lightly regulated jurisdictions like El Salvador or the Dominican Republic.

Implications for the future of the stablecoin market

The outcome of the GENIUS debate will determine the future of U.S. digital payment infrastructure over the next decade. If the identified weaknesses are addressed, the law could become a global benchmark. If passed without changes, it could lead to costly litigation and undermine institutional trust that the market needs.

The weaknesses presented by prosecutors are not academic: Tether and Circle process billions of dollars in daily transactions. A legal gap in GENIUS could jeopardize the security of hundreds of millions of cryptocurrency users, many of whom are small investors lacking the legal sophistication to defend themselves against fraud or issuer negligence.

Key questions in the regulatory debate

Why immunity for issuers?
Some lawmakers believe that protection from excessive civil liability allows fintech startups to experiment. However, prosecutors argue that shielding against criminal responsibility—especially in cases of complicity in fraud—is unacceptable.

Can issuers truly protect users?
While Tether and Circle have resources to implement sophisticated measures, smaller projects may lack technical capacity. GENIUS should require minimum uniform standards, not let each issuer set its own level of protection.

What about transnational fraudulent transactions?
Stablecoins operate globally, but regulations are local. GENIUS must include clear mechanisms for international cooperation to prevent criminals from exploiting jurisdictional gaps.

Is GENIUS competitive with MiCA?
If GENIUS is significantly weaker than MiCA, regulatory arbitrage could occur, with high-risk operations migrating to U.S. jurisdictions. Paradoxically, this could make the U.S. less safe, not more innovative.

Conclusion: the way forward

The intervention by New York prosecutors marked a turning point in the GENIUS debate. Their specific, documented weaknesses cannot be ignored by legislators committed to consumer protection. The bill needs substantial legal language amendments to close gaps that allow issuer immunity, ensure uniform victim recovery protocols, and enforce rigorous international cooperation.

The challenge is to craft these protections without creating overly restrictive regulation that discourages innovation. The coming weeks will be critical in determining whether lawmakers can navigate this tension or if GENIUS becomes a law that satisfies no one: insufficiently safe to protect consumers, yet too regulated to foster responsible innovation.