The Weaknesses of the GENIUS Project: Examples of Risks That Concern New York Prosecutors

In early 2025, the United States’ most ambitious stablecoin regulatory proposal faced devastating criticism. New York prosecutors identified concrete examples of weaknesses in the draft GENIUS bill that could facilitate fraud, evade legal responsibility, and expose consumer vulnerabilities. This conflict between regulators and lawmakers raises fundamental questions about how to govern a digital payments market valued in the trillions of dollars.

Concrete Examples: How Tether and Circle Expose Regulatory Weaknesses

The prosecutors’ analysis was not theoretical. They examined the actual operations of major stablecoin issuers to identify systemic weaknesses that the GENIUS draft did not adequately address.

In the case of Tether (USDT), judicial officials pointed out that its selective wallet freezing policy for addresses linked to illicit activities leaves victims powerless. While funds are frozen, there is no clear mechanism for recovery or restitution. The complex global blockchain transactions make it extremely difficult for harmed parties to recover stolen assets.

Circle (USDC) presents a different paradox. The company publicly positions itself as an ally of regulators, but its policies for protecting victims of fraud are less robust than it claims. According to the prosecutors’ analysis, the current form of the GENIUS bill would allow these inconsistent standards to persist across different issuers, fragmenting the fraud response depending on the actor.

These examples revealed a fundamental weakness: the bill did not require uniform, mandatory protocols for issuers to cooperate in recovering stolen funds or to establish clear liability clauses.

Specific Weaknesses Identified by Prosecutors: What Is Missing in the GENIUS Framework

Attorney General Letitia James and Manhattan District Attorney Alvin Bragg jointly presented a formal analysis detailing three critical weaknesses.

First Weakness: Unintentional Legal Immunity. The bill’s language could grant issuers legal protections that shield them from liability when their stablecoins facilitate illicit transactions. This would create a legal gap where criminals could more easily move funds without facing consequences for the issuer.

Second Weakness: Lack of Mandatory Compliance Standards. The GENIUS bill did not specify uniform anti-money laundering (AML) or know-your-customer (KYC) requirements. This allowed each issuer to interpret the rules at their discretion, creating inconsistencies that fraudsters could exploit.

Third Weakness: Weak Restitution Mechanisms. There were no clauses requiring issuers to temporarily freeze fraudulent funds or actively cooperate with law enforcement investigations with real-time information. Victims would be left without explicit legal protection.

The following table contrasts the bill’s intended goals with the concrete risks identified:

Industry Defense: Responses to the Highlighted Weaknesses

Issuers responded strongly to these criticisms of the regulatory framework.

Circle argued that the GENIUS bill, far from being deficient, precisely represents what the sector needs: a federal clarification that elevates standards beyond the current patchwork of fragmented state regulations. According to the company, this would create a stronger baseline of protection, not a weaker one.

Tether reaffirmed its commitment to zero tolerance for criminal activities. The company highlighted decades of voluntary cooperation with global judicial agencies, including proactive fund freezes and suspicious activity reports to authorities.

However, prosecutors observed a deeper issue. Even if these companies act in good faith, the absence of uniform legal requirements means protection depends on good corporate behavior, not on binding legal obligations. This is precisely what is lacking: structural weaknesses that go beyond commercial intentions.

Global Regulatory Framework: Examples of How Other Countries Address These Risks

The debate over weaknesses in the GENIUS bill gained perspective when compared to international initiatives.

The European Union advanced with its MiCA (Markets in Crypto-Assets) regulation, which came into force with significantly stricter rules. MiCA required higher capital reserves, segregated custody, explicit investor protections, and insolvency procedures for issuers. Analysts often noted that MiCA adopted a more cautious stance toward systemic risks.

Comparing both frameworks, European examples demonstrated that rigorous regulation does not stifle innovation. Europe maintains an active stablecoin sector while imposing safeguards that GENIUS does not consider. This raises the uncomfortable question: why can’t the U.S. do the same?

This international comparison strengthened the prosecutors’ argument: weaknesses are not inevitable but are the result of legislative choices that prioritize speed over protection.

Conclusion

New York prosecutors’ warnings highlighted substantial weaknesses in the GENIUS bill that go beyond technical disagreements. They identified real risks and concrete examples of how the current framework could allow fraud to thrive without clear legal consequences for the actors involved.

The future of cryptocurrency regulation in the U.S. will depend on whether lawmakers can amend these weaknesses without sacrificing responsible innovation. International examples suggest it is possible. The question now is whether U.S. legislators will have the will to do so.

Frequently Asked Questions

What exactly is the GENIUS bill?
It is the U.S. Economic Innovation Generation for Stablecoins Act, a proposal to create a federal framework regulating the issuance, reserves, and redemption rights of payment stablecoins.

What are the main weaknesses identified?
Prosecutors found three: potential legal immunity clauses, lack of uniform AML/KYC standards, and weak restitution mechanisms for fraud victims.

Why are the examples of Tether and Circle relevant?
Because they show the current inconsistency: Tether freezes funds but without clear recovery; Circle positions itself as a regulator ally but with less comprehensive protections. The GENIUS bill does not establish uniform standards to prevent these inconsistencies.

How did the industry respond?
Circle argued that GENIUS improves standards. Tether reaffirmed its zero-tolerance policy. But prosecutors pointed out that good intentions do not equate to structural legal obligations.

How does this compare to international regulations?
European MiCA sets more rigorous requirements without stifling innovation, suggesting that the weaknesses in GENIUS are not inevitable but are due to legislative priorities.