Key Takeaways:

• Clause 4(b) of the GENIUS Act supersedes state laws, but offers no restitution.
• The GENIUS Act also gives power to issuers to burn tokens, but not return the backing assets.
• Prosecutors claim victims are left helpless, while issuers rake in almost 5% interest annually from the assets.

The Guiding and Establishing National Innovation for US Stablecoins (GENIUS Act) is under a microscope again. New York prosecutors have pointed to a loophole that serves stablecoin issuers instead of users, effectively letting more than $3 billion in funds be frozen.

The prosecutors claim that the frozen funds continue to generate yield and interest rate for the issuers, as much as $170 million per year.

Frozen stablecoins are a boon for issuers

According to the prosecutors, Tether and Circle, the top stablecoin firms, have frozen around $3.414 billion in assets. Both issuers back their USD pegged stablecoins with cash, treasury bills, and other assets for their respective USDT and USDC coins.

Complying with laws, the issuers regularly freeze funds if there is an illicit activity involved. This is where the prosecutors argue the GENIUS Act’s advantage steps in for the institutions.

While the coins are frozen and practically immovable, the firms continue to enjoy the backing assets, earning yields as much as 5% annually.

No restitution under the GENIUS Act

The prosecutors point to section 4(b), which effectively trumps state laws when it comes to protecting fraud victims. This clause does not have any provision that would lead to stablecoin issuers returning stolen funds to their true rightful owners.

This creates a regulatory vacuum, which effectively neutralizes state-level consumer protection laws, but fails to offer a replacement federal-level one. This has also been highlighted in the past.

Issuers can burn tokens, but keep the collateral

The GENIUS Act also gives the US Department of the Treasury the power to order stablecoin issuers to burn the tokens, where the digital assets are sent to a one-way wallet so they cannot be used ever again.

But when ordered to burn the tokens, the issuers are under no obligation to hand over the collateral to authorities or victims, unless implicitly asked to do so under a legal final settlement. Even this can take time. Since the issuer gets to hold on to the deposited collateral, it continues to accrue interest and yield for the institutions, as victims sit on the sidelines.

Industry leaders argue that the CLARITY Act is controversial

The GENIUS Act became a law in July 2025 and is already implemented. However, this is not the only act that is increasingly being seen as having issues. For instance, industry experts and the banking sector met at the White House on February 2 2026, to continue debating the CLARITY Act (Digital Asset Market Clarity).

The meeting failed to resolve a running dispute, incidentally also connected to stablecoins. But this time, the debate is regarding whether crypto exchanges should be allowed to offer interest to users who park their stablecoins on the exchanges.