WASHINGTON, D.C. — As the stablecoin market rapidly evolves, Federal Reserve Governor Michael Barr has emphasized the critical need for cautious regulation to prevent risks associated with supposedly secure digital assets.
Speaking at the DC Fintech Week event on Thursday, Barr cautioned legal experts and industry leaders about the inherent vulnerabilities tied to privately issued, liquid liabilities—those assets redeemable at par value but backed by reserves that may be subject to doubt.
“Nominally safe assets backed by even high-quality reserves can expose private money to run risk,” Barr stated, highlighting concerns about the inclusion of uninsured deposits as allowable reserves. Such deposits, he noted, magnified pressures during the banking turmoil in March 2023.
Barr, who previously served as the Federal Reserve’s top financial-supervision official before stepping down with the change of administration in 2017, remains a sitting member of the seven-person Fed board. Throughout his tenure, he has been regarded as a cautious voice on crypto regulation, particularly regarding the risks of insufficient safeguards in private money creation.
Drawing on historical parallels, Barr pointed to money market funds’ fragility during financial crises. Notably, the Reserve Primary Fund “broke the buck” in 2008, losing its $1-per-share value at the onset of the global financial crisis, with similar strains emerging during the COVID-19 pandemic.
Despite the enactment of the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, regulators have yet to finalize the detailed rules needed for full implementation. This regulatory delay has left stablecoin issuers navigating an uncertain landscape while major players like Tether continue operating offshore, under reserve frameworks that may not meet future U.S. standards. Tether, however, has announced plans to formally enter the U.S. market.
Barr stressed the incentives for stablecoin issuers to increase profits by investing reserve assets in higher-risk instruments. “Issuers have a strong motivation to push reserve asset boundaries,” he explained, “which while profitable in stable periods, risks undermining confidence when markets experience stress.”
Corey Then, vice president and deputy general counsel for global policy at Circle—the issuer of the U.S.-based stablecoin USDC—voiced agreement with Barr’s observations. Speaking at the same event, Then acknowledged the complexities remaining in crafting effective regulations and endorsed a cautious regulatory environment.
Among the specific concerns Barr raised were uninsured deposits and “overnight repo” agreements as potential reserve asset classes, both of which could introduce volatility. This cautionary view follows challenges faced during the 2023 crisis, when Circle had a significant portion of its reserves tied up in the collapsed Silicon Valley Bank, momentarily impacting USDC’s dollar peg. The stablecoin ecosystem has also witnessed sharp deviations from the peg, as exemplified by the 2022 collapse of Terra’s UST.
In a forward-looking scenario under the GENIUS Act, Barr speculated on the potential to consider bitcoin-backed repurchase agreements as eligible reserve assets, inspired by bitcoin’s status as legal tender in El Salvador.
Barr concluded by urging federal and state regulators to develop a comprehensive regulatory framework that addresses gaps and implements strong protections for stablecoin users. His remarks underscore the Federal Reserve’s commitment to safeguarding financial stability amid the expanding role of digital assets in the economy.
