Fed Board Member "Stablecoins Must Take Note of Past Failures"

Michael Barr, a Federal Reserve (Fed) governor and former head of financial supervision, warned that care must be taken in designing future stablecoin regulations to avoid repeating past failures of private money.

On the 17th (local time), according to CoinDesk, Barr said at a fintech week event in Washington, D.C., "When issuing liquid liabilities redeemable at par, private money is exposed to the risk of 'runs' if investor confidence is fragile, even if the collateral assets are high-quality."

He warned that including uninsured deposits or volatile short-term repurchase agreements (overnight repo) as reserves could increase risks.

He added, "Historically, privately issued money issued under inadequate safeguards has led to financial crises," citing the Reserve Primary Fund's failure to maintain its $1 peg during the 2008 global financial crisis and the liquidity crunch during the COVID-19 pandemic.

The U.S. passed the 'U.S. Stablecoin Innovation and Guidelines Act (GENIUS Act)' last September, but regulators such as the Federal Reserve and the Treasury have not yet drafted detailed implementing rules. In the market, Tether, issuer of USDT, still dominates as the world's largest stablecoin despite operating a reserve structure that does not meet U.S. standards.

Barr said, "Stablecoin issuers have an incentive to maximize returns on reserve management; this increases returns in good times but can lead to a loss of confidence when market stress occurs." He emphasized, "Stablecoin regulation must include robust safeguards to protect users and ensure financial stability."