Federal Reserve Governor Michael Barr has raised alarms over potential risks associated with stablecoins as regulators work on new rules under the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act. During his address at DC Fintech Week, he emphasized the vulnerability of private money systems to “run risk,” particularly when reserves may include uninsured deposits or other high-risk assets.
Barr, who previously led the Fed’s financial supervision, noted the historical dangers of inadequately safeguarded private currencies. He cited the Reserve Primary Fund’s collapse in 2008 and subsequent pressures on money market funds during the COVID-19 pandemic as warnings for current regulatory efforts. As U.S. banks grapple with the “debanking” trend, which led to reduced engagement in the crypto sector, Barr’s insights shed light on the importance of robust regulations.
Despite the enactment of the GENIUS Act, the regulations necessary to implement it have yet to be finalized, leaving the industry in a regulatory gray area. Barr pointed out that stablecoin issuers, driven by profit motives, often take on excessive risks, especially when it comes to managing reserve assets. He cautioned against permitting the use of potentially volatile assets like overnight repos as reserves.
Corey Then, from Circle, the issuer of USDC, echoed Barr’s sentiments, emphasizing the need for careful regulatory processes to avoid creating a permissive environment for risk-taking. Given recent banking stress, including Circle’s exposure to Silicon Valley Bank, the discussion underscores the critical need for regulatory frameworks that can mitigate risks while fostering innovation in the stablecoin space.
Barr concluded that a comprehensive set of rules is essential to protect users and stabilize the broader financial system. He warned that differing regulatory standards at various government levels could lead to arbitrage, which would undermine the intent of the GENIUS Act.
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