- A Fed governor highlighted that the regulatory framework on stablecoins established by the GENIUS Act should be complemented by strict federal oversight.
- The warning comes amid the scheduled markup of the Clarity Act, which aims to patch the regulatory gaps of the GENIUS Act on digital assets.
Michael Barr, Governor of the Federal Reserve, highlighted in an interview the need to establish strong safeguards for stablecoin. He believes that the GENIUS Act’s regulatory framework is insufficient without strict enforcement of federal oversight.
Fed Pushes For Stringent Oversight of Stablecoins
The Fed official emphasized that the GENIUS Act will advance the development of stablecoins, but warned about the risks they pose if the implementing rules are weak. Recalling the “long and painful history of private money created with insufficient safeguards,” he urged proper monitoring of their reserves.
Barr stated stablecoins will only be stable if holders can reliably and promptly redeem at par in a wide range of conditions. These include market stress, where even liquid government debt might face valuation pressure and strain on the issuer or its related entities. He pointed out that several issuers, in their efforts to maximize returns, could take more risk in managing the assets.
The federal regulator’s caution draws parallels to the Free Banking Era of the 19th century, a time when deregulation gave private banks free rein to issue their own paper currencies. However, the lack of central bank supervision and uniform safeguards led to the private currencies typically trading below their face value as they moved away from their sources. Additionally, several historians noted a high rate of bank failures during the era.
Moreover, Barr called for robust measures to curb the use of stablecoins for illicit activities, including money laundering, criminal and terrorist financing, tax evasion, and sanctions evasion. He grounded his concerns on the permissionless system of stablecoins, granting them “bearer instrument” dynamics and allowing users to bypass standard banking or regulatory corridors.
Stablecoin Issues in the Clarity Act
The Fed governor’s statement follows the scheduled Clarity Act markup on the Senate floor around the last two weeks of April. Although the hottest debates about it center on stablecoin yields, the bill also lays out ways to prevent their use in illicit finance.
Besides the existing anti-money laundering laws and reporting requirements, the act authorizes the US Treasury to intervene swiftly when it has sufficient grounds to determine that illegal activities involving stablecoins are occurring. Furthermore, it designates digital asset intermediaries as financial institutions, requires US persons to operate their distributed ledger application layers, and provides a targeted “hold law” safe harbor protecting digital asset providers from private lawsuits if they pause suspicious transactions.
