A new law establishing a regulatory framework for stablecoins has “gaps” that could pose risks to financial stability and consumer protection if federal and state regulators don’t establish safeguards for individuals and businesses, Federal Reserve Governor Michael Barr said today.
The Genius Act, passed by Congress earlier this year, created a legal path for banks and nonbanks to issue stablecoins and provide services to other stablecoin issuers. In a speech at a financial technology conference in Washington, D.C., Barr said that stablecoins have several potential benefits, and that the Genius Act made important progress in building a foundation for regulating the digital currency.
Still, Barr said, “it will be up to both the federal banking agencies and the states to coordinate and develop a comprehensive set of rules that can fill in important gaps and ensure that there are robust guardrails to protect users of stablecoins and mitigate broader risks to the financial system.”
Potential pitfalls
As one example, Barr noted that the value of stablecoins is pegged to reserve assets subject to stress. “Permissible reserve assets include uninsured deposits, which were a key risk factor during the March 2023 banking stress. While the Genius Act permits regulators to limit the concentration of reserve assets in uninsured deposits, it will matter how these rules are written,” he said.
The law also allows both federal banking agencies and states to serve as the primary regulator of stablecoin issuers, which could result in a broad spectrum of regulatory regimes and the creation of uninsured national or state-chartered trust banks. “This authorization and related decisions by regulators may result in trust banks that engage in a broader range of non-fiduciary, non-custodial, principal activities,” Barr said.
As for consumer protection, the law created a narrow definition of “stablecoin” that allows some digital assets that would otherwise qualify to avoid its regulation, lacks sufficient protections to prevent the mixing of bank-like activities and commerce, and does not provide consumers with the fraud protections applicable to traditional payment instruments, he said.
Tokenized deposits
Barr also said that the blockchain technology that supports stablecoins can be used for tokenized deposits, which have the advantage of being part of a regulatory framework that has been tested over time. Banks face robust regulatory and supervisory regimes, and they have access to the Fed’s discount window, where they can readily monetize assets in times of stress, he said.
“I don’t want to say this system is perfect — it definitely is not — but it is far more robust than what we have developed so far for stablecoins,” Barr said. “Thus, it may make sense for both market participants and regulators to consider how tokenized deposits will fit into this ecosystem.”
