WASHINGTON, DC – The crypto sector and some of Wall Street’s financial giants are sprinting to put Stablecoin infrastructure in place ahead of US watchdogs The risks taken by the safe assets are nominally.
“Issuing liquid liabilities that are redeemable at par but backed by assets, even high-quality ones, about which creditors can have questions makes private money vulnerable to run risk,” Barr said at a DC Fintech Week event in Washington, pointing out that allowed reserves such as uninsured deposits can pose risks.
He was the Fed’s top financial supervision official as the board’s former vice president in that role, but he stepped down when President Donald Trump’s administration took over. The digital assets sector saw Barr as part of a “debanking” trend that industry insiders accused of reverses the stricter stance of crypto policy They took during his tenure.
But Barr remains on the seven-member Fed Board and warned the agencies writing StableCoin rules—including his own—of the “long and painful history of private money created with inadequate safeguards.”
Barr offered the US experience with money market funds as an example, noting that the Reserve Primary Fund “Broke the Buck” – the value fell by $ 1 per share – in 2008 during the global financial crisis, and how the more recent covid pandemic has put pressure on such a fund.
In spite of passage In the Guiding and Establishing National Innovation for the US StableCoins (Genius) Act, banking regulators have yet to write the rules they will need to implement it, leaving the industry in a kind of irregular gray area. As it goes on, the world’s leading stablecoin, Tether’s USDT, is operating offshore and under a reserve strategy that does not qualify against the pending US standard (although Tether also Planning a full entry into US markets).
“StableCoin Issuers traditionally retain income from the investment of reserve assets and therefore have a high incentive to maximize the return on their reserve assets by expanding the risk spectrum as much as possible,” said Barr. “Stretching the boundaries of permitted reserve assets may increase profits in good times but risks a crack in confidence during the inevitable bout of market stress.”
“For the most part, I agree with everything he says,” said Corey at the time, vice president and deputy general counsel for global policy at Circle, the issuer of USDC, the leading US-based stablecoin.
“There’s a lot of work to be done in the decision process,” the executive said at the same event in Washington, taking the stage after Barr. “The last thing we want in the Circle is a permissive environment.”
Barr described the inclusion of unsecured deposits as potential reserves for issuers under the genius, noting that they are “a major risk factor during the March 2023 banking stress.” He also pointed to the so-called “overnight repo” as a reserve component that “could include potentially volatile assets.”
During the 2023 crisis in US tech-centric banks, Circle has 8% of its reserves in the failure of Silicon Valley Bank, worth more than $ 3 billion, causing a Rush to redeem USDC That pushed it temporarily off its dollar peg. Other high-profile stablecoins have also strayed from the peg, including sa Implosion of Terra’s Ust in 2022.
Barr offered a genius hypothetical, suggesting that because Bitcoin has become legally soft in El Salvador, an argument can be made for the Bitcoin repo as a worthy reserve asset.
Federal and state regulators need to write “a comprehensive set of rules that can fill important gaps and ensure robust safeguards are in place to protect users of StableCoins and reduce broader risks to the financial system,” Barr said.
However, because issuers can be regulated by a spectrum of government agencies at both the federal and state levels, he warned of the risk of arbitration where issuers shop for the easiest watchdog, despite the Genius Act’s intent to make them similar.
In the meltdown of 2008, the risky financial products American International Group undetected hazards That threatened the broader financial system. (OTS follows broke up.)
Read more: Tether CEO says he followed the genius to come to us, Circle says it’s set now
