Federal Reserve Board of Governors member Michael Barr called for caution and strict oversight of stablecoins.
During a recent discussion on the stablecoin law, the GENIUS LawBarr highlighted key uses for the products, including trading cryptocurrencies, cheaper remittances and saving abroad.
However, he raised concerns about stablecoins facilitating terrorist financing and the risk to financial stability.
Well, data from Chainalysis estimates that stablecoins now account for 84% of illicit crypto activity. This is a massive increase from just 15% in 2020. Hackers are now adopting stablecoins and P2P transactions to evade sanctions.
To curb this, Barr recommended:
Regulatory and technological solutions will need to be deployed to limit these risks.
Despite the sharp increase, overall illicit activity only represents less than 1% of total crypto transactions.
Regarding the risk to financial stability, Barr cited the “long and painful history” of competition between private money (bank notes) in the 1800s, which led to bank runs and financial panics because their exchanges were below par.
The cause? Poor quality reserve assets and weak collateral. Barr added,
Strict control of reserve assets, combined with supervision, capital and liquidity requirements, and other measures, could improve the stability of stablecoins and make them more viable payment instruments.
This is part of the rulemaking process as regulators work to meet the July 2026 deadline for implementing the GENIUS Act. So far, the OCC and NCUA have published proposed rules for the same. The Fed and other regulators are expected to follow suit and finalize their guidelines by the start of the third quarter.
Stablecoins: USD-based vs. others
For issuers, the GENIUS law offers clear rules. But for the U.S. government, this is an increasingly important line of demand for Treasury bills to finance your debt.
Although USD-based versions (USDT, USDC) dominate the current $315 billion stablecoin market, non-USD alternatives have emerged. record growth. Since 2023, non-USD stablecoins have grown from $350 million to $1.2 billion. This is a 3x expansion of stable dollar growth, primarily dominated by Euro-based alternatives.
Beyond currency-based metrics, Asia accounts for more than 60% of global stablecoin activity, primarily driven by the Singapore-Japan-Hong Kong-China corridor. Interestingly, these jurisdictions are pushing for stable currency rules that could restrict revenue based on USD choice. It is unclear what impact these changes will have on the current dynamics of the stablecoin market in the coming months.
Final Summary
- The Fed’s Barr called for strict oversight of stablecoins to avoid a repeat of the “painful” banking panics of the 1800s driven by private money.
- The stablecoin market could see major changes as the world’s leading adoption jurisdictions consider restricting dollar-based alternatives.
