Quick Takeaways
- Federal Reserve Governor Michael Barr warns that the GENIUS stablecoin law of nature could create “regulatory arbitrage” risks.
- Barr alleges stablecoins must stay reliable and fully backed up to protect consumers.
- Coordination between the Federal and the United States Department of State regulators is crucial to close the crack in the New stablecoin framework.
Fed’s Michael Barr Flags Gaps in GENIUS Stablecoin Law, Warns of Regulatory Arbitrage Risks
Federal Reserve Governor Michael Barr raised concerns over the recently enacted GENIUS stablecoin practice of law, noting that the framework, though a step forward, leaves meaningful regulatory gaps that could expose the fiscal arrangement to new risks.
GENIUS Law Seen as Progress, But Lacking in Key Areas
Speaking at DC Fintech Week on Thursday, Barr said the Guiding and Establishing Innovation for U.S. Stablecoins Act (GENIUS), signed into law by President Donald Trump earlier this year, represents a “meaningful improvement” in establishing federal oversight for stablecoins.
However, Barr warned that the law does not fully address how regulators should coordinate on oversight. “It’s up to the federal banking agencies and states to fill significant gaps to protect users and reduce risks to the financial system,” he said.
Risks of Regulatory Arbitrage and Misinterpretation
Barr highlighted that the GENIUS law could inadvertently incentivize regulatory arbitrage—where issuers exploit inconsistencies across jurisdictions.
“In fact, issuers may argue that they are permitted under the act to perform the full range of activities conducted by FTX, provided they make the relevant representations and conduct appropriate accounting,
” Barr cautioned. Without tight coordination, he warned, some regulators may allow risky activities that could endanger stablecoin issuers and consumers alike.
He also noted that some digital products labeled as “stablecoins” might fall outside the GENIUS framework, creating confusion among consumers about what protections actually apply.
Stablecoins: Balancing Promise and Peril
Barr acknowledged that stablecoins have both risks and benefits. They can reduce remittance costs and support cross-border trade, but their stability depends on robust regulation and full backing.
“Stablecoins will only be stable if they can be reliably and promptly redeemed at par in a range of conditions,” Barr said, emphasizing that stress scenarios such as market shocks must not compromise redemption reliability.
What GENIUS Requires from Issuers
The GENIUS Act mandates that all stablecoins be fully backed by U.S. dollars or similarly liquid assets, introduces annual audits for issuers with a market capitalization exceeding $50 billion, and outlines rules for foreign-issued stablecoins.
Key agencies, including the Federal Reserve and state regulators, are now in the process of implementing these provisions.
The Fed’s Continued Role in Stablecoin Oversight
Barr, who previously served as the Fed’s vice chair for supervision, has long advocated for bringing stablecoin issuers under federal prudential oversight.
He reiterated that the central bank has a “strong interest in ensuring that any stablecoin offerings operate within an appropriate federal framework.”
As the GENIUS law rolls out, regulators are expected to refine coordination efforts to ensure consumer protection and systemic stability remain at the forefront of digital asset innovation.
