- U.S. regulators have not finalized rules for stablecoins, leaving the sector in a regulatory gap.
- Federal Reserve Governor Michael Barr warned that stablecoins could pose risks similar to historical financial crises if not properly regulated.
- The recently passed GENIUS Act guides future stablecoin regulation, but rules are still being drafted.
- Barr highlighted that stablecoins using uninsured deposits and volatile assets as reserves increase vulnerability during market stress.
- Industry leaders, including executives at Circle, agree more work is needed to ensure safe, robust rules for stablecoins in the U.S.
WASHINGTON, D.C. — The stablecoin sector and large U.S. financial institutions are preparing operational frameworks ahead of formal stablecoin regulations by federal authorities. On Thursday, Federal Reserve Governor Michael Barr emphasized the dangers of stablecoins, citing risks if issuers fail to adopt strong safeguards.
Barr spoke at a Washington event during DC Fintech Week, warning that privately issued digital assets labeled as “safe” may still be vulnerable to bank-style runs. He noted that allowing stablecoin reserves to include uninsured bank deposits or other potentially volatile assets could undermine user confidence, especially under economic pressure.
“Issuing liquid liabilities redeemable at par but backed by assets, even high-quality ones, about which creditors might have questions makes private money vulnerable to run risk,” Barr said. He referred to historical examples such as the 2008 collapse of the Reserve Primary money market fund and issues seen during the COVID-19 pandemic as reminders of the dangers posed by insufficiently protected private money. Barr also warned that parts of the GENIUS Act could allow risky assets to be counted as reserves.
Barr noted that although the GENIUS Act, which provides a framework for U.S. stablecoin oversight, has passed, federal banking agencies have yet to issue implementing rules. He pointed out that the world’s largest stablecoin, Tether’s USDT, operates outside U.S. regulations, with reserve practices that would not meet planned American standards, though Tether has announced plans to enter the U.S. market.
Barr also highlighted the risk of regulatory “arbitrage,” where firms might select the laxest federal or state regulator. He compared this risk to the fragmented supervision of American International Group (AIG) before the 2008 financial crisis, which allowed hazardous activities to go unchecked.
Corey Then, vice president for global policy at Circle, expressed agreement with Barr, stating, “There’s a lot of work to be done in the rulemaking process. The last thing we want at Circle is a permissive environment.” During the March 2023 banking turmoil, Circle had more than $3 billion in reserves with the now-failed Silicon Valley Bank, causing a temporary loss of USDC‘s U.S. dollar peg.
Barr called on all relevant agencies to write comprehensive rules with strong safeguards to protect stablecoin users and reduce systemic risk. He stressed the importance of clear, robust guardrails for these digital assets, referencing the long history of issues with private forms of money in the U.S.
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