WASHINGTON—The future stability of the U.S. stablecoin market will depend heavily on how regulators interpret and coordinate their enforcement of the new GENIUS Act, Federal Reserve Governor Michael Barr said, warning that unclear standards could turn the technology into a source of systemic risk.
Barr, who previously served as the Fed’s vice chair for supervision, said regulators face a “lot of work” to define the rules governing stablecoin reserves and oversight. As written, he noted, the act’s definition of eligible reserve assets could open the door to volatile holdings, including Bitcoin.
“The act permits repos backed by ‘any medium of exchange authorized or adopted by a foreign government,’” Barr said. “That definition could encompass volatile assets such as Bitcoin, given El Salvador’s recognition of Bitcoin as legal tender. A clever issuer might argue that a Bitcoin-backed repo qualifies as an eligible reserve asset.”
Stablecoin issuers, he added, have strong incentives to “maximize the return on their reserve assets by extending the risk spectrum as far out as possible.” But Bitcoin-backed stablecoins, Barr warned, would “naturally be less stable than their name might imply.”
Risks in Reserve Assets
Barr said one of the most immediate regulatory challenges lies in defining the prudential standards for reserve holdings. The act allows reserves such as U.S. Treasuries, repos and deposits, but some of those categories include potential vulnerabilities.
One provision allows the inclusion of uninsured deposits, Barr said, recalling the bank runs that toppled Silicon Valley Bank and Signature Bank in March 2023. “Issuing liquid liabilities redeemable at par but backed by assets, even high-quality ones, about which creditors might have questions, makes private money vulnerable to run risk,” he said. “Three key features—redemption on demand, at par and backed by noncash assets—render stablecoins susceptible to runs similar to fragile banks or money market funds.”
Fragmented Oversight
Barr also warned that the GENIUS Act’s supervisory structure—dividing authority among four federal agencies and all state and territorial regulators—could lead to inconsistent rulebooks. While the law calls for “substantially similar” oversight, the reality could produce regulatory arbitrage.
“The U.S. has long wrestled with the consequences of regulatory pluralism,” Barr said. “A patchwork of standards could incentivize issuers to seek the most permissive charter, creating a race to the bottom in oversight.”
That risk, he added, is amplified by the act’s broad definition of permissible activities. Stablecoin issuers may engage in “digital asset service provider” and “incidental” functions such as exchange or brokerage operations—terms that could be interpreted differently across jurisdictions.
Barr cautioned that a lenient state regulator could permit an issuer to take on risks resembling those of failed crypto exchange FTX while maintaining minimal capital. Unless regulators harmonize their interpretations, he said, the act could “enable the very intermediation risks it was designed to contain.”
Tokenized Deposits as Alternative
Barr said tokenized deposits—digital versions of insured bank deposits—may offer a safer path. Unlike stablecoins, they operate fully within the banking system and benefit from deposit insurance, established supervision, and access to the Federal Reserve’s discount window.
“Efficiency without trust is self-defeating,” Barr said. “Tokenized deposits preserve the technological advantages of stablecoins while maintaining the safeguards of traditional banking.”
