Fed’s Michael Barr Warns of Stablecoin Risks as Industry Outpaces Regulation

The crypto industry and major Wall Street firms are racing to build stablecoin infrastructure ahead of formal U.S. regulations, but Federal Reserve Governor Michael Barr has warned that these efforts come with significant risks. Speaking at DC Fintech Week, Barr cautioned that even “nominally safe” private money can trigger financial instability if reserves are not adequately safeguarded.

Barr highlighted that issuing liquid liabilities backed by questionable assets could expose stablecoins to “run risks.” He noted that allowable reserves—like uninsured deposits—pose dangers similar to those that fueled the 2023 banking stress. The Fed governor drew parallels to the 2008 financial crisis, when the Reserve Primary Fund “broke the buck,” and to the market turmoil during the COVID-19 pandemic, emphasizing the “long and painful history” of unstable private money.

Although Congress passed the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, regulators have yet to issue implementing rules. This regulatory gap has left stablecoin issuers such as Tether and Circle operating in a gray area. Tether’s USDT, for example, remains offshore and would not currently qualify under the coming U.S. standards.

Barr warned that issuers’ profit motives could push them to “stretch the boundaries” of permissible reserves, increasing risk during market stress. Circle’s Deputy General Counsel, Corey Then, echoed Barr’s sentiment, saying that a “permissive environment” would harm the industry in the long run.

Barr also cautioned against potential regulatory arbitrage, where issuers seek the most lenient oversight, citing AIG’s pre-2008 supervision as a cautionary tale. He urged U.S. regulators to establish “robust guardrails” to protect users and the financial system.

As the stablecoin market expands faster than the rules meant to govern it, Barr’s remarks serve as a timely reminder that innovation without safeguards could invite the next financial crisis.