US Federal Reserve (Fed) Governor has warned about the potential risks that stablecoin may pose to financial stability and urged for strong oversight, as the industry awaits the final text of the highly anticipated crypto market structure bill.
Fed Governor Calls For Stablecoin Clarity
On Tuesday, Fed Governor Michael Barr discussed the importance of stablecoin regulations, noting that landmark legislation, the Guiding and Establishing Innovation for US Stablecoins (GENIUS) Act, provides “some needed clarity” to issuers about how they can fit into the regulatory framework.
During a Federalist Society event, Barr listed main use cases for tokens pegged to the US dollar, including facilitating crypto trading and as a store of value in some foreign jurisdictions. He also highlighted that they can be used to offer reduced remittance costs, expedite trade finance processing, and assist firms in managing their treasury functions.
However, the Fed Governor emphasized that “a great deal” of the clarity will “depend on how federal and state regulators implement the statute.” Therefore, regulators still need to address multiple risks, he warned, explaining that caution is warranted due to “a long and painful history of private money created with insufficient safeguards.”
Key issues include regulation of reserve assets, the potential for regulatory arbitrage, the scope of permissible activities for stablecoin issuers beyond issuance, appropriate capital and liquidity requirements, anti-money-laundering controls, and consumer protection requirements.
The federal regulator called for regulatory and technological measures to ensure that stablecoins are not used for illicit activity, affirming that “tight control over reserve assets, coupled with supervision, capital and liquidity requirements, and other measures, could enhance the stability of stablecoins and make them more viable payment instruments.”
His remarks come as the US Treasury Department seeks public feedback on the GENIUS Act Notice of Proposed Rulemaking (NPRM) concerning state-level regulatory regimes, issued on April 1.
Final Text On Yield Compromise Delayed
Barr’s warning also follows the clash between the crypto and banking industries over stablecoin-related language that is set to be included in the crypto market structure bill, also known as the CLARITY Act, which was expected to be released as soon as this week but might be delayed until later in the month.
In a shift from last week’s guidance, the bill’s final text of the compromise between industry stakeholders and the Senate Banking Committee is no longer expected to be published this week, a spokesperson for Senator Thom Tillis’s office told Crypto In America on Wednesday.
A source familiar with the matter stated that the delay reflects concerns that releasing the text ahead of a markup, now expected in the back half of the month, could give opponents an opening to slow the bill’s progress.
Notably, the two parties have been fighting over the potential prohibition of yield and rewards on stablecoin balances, stalling the crypto bill for over two months. Last week, the crypto industry got its first look at the latest version of the CLARITY Act, set to address the long-standing dispute.
As reported by Bitconinist, the proposal seemingly prohibited platforms from offering yield, directly or indirectly, for holding a stablecoin, or in a manner that resembles a bank deposit. This restriction would broadly apply to digital asset service providers, including exchanges and brokers, as well as their affiliates.
The text aimed to limit workarounds and prohibit any activity “economically or functionally equivalent” to interest, addressing concerns from the banking industry side, but facing renewed backlash from crypto players like Coinbase.
According to the Wednesday report, the update follows ongoing talks between crypto and banking groups due to dissatisfaction with the earlier draft agreed upon by Tillis, Senator Angela Alsobrooks, and the White House.
The total crypto market capitalization is at $2.35 trillion in the one-week chart. Source: TOTAL on TradingView
Featured Image from Unsplash.com, Chart from TradingView.com
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