- Barr warns the GENIUS stablecoin law may allow regulatory arbitrage risks.
- GENIUS law gaps could confuse consumers about stablecoin protections.
- Barr calls for federal and state regulators to address stablecoin risks.
- Stablecoin issuers with over $50B must undergo annual audits under GENIUS.
Federal Reserve Governor Michael Barr has raised concerns about the recently passed GENIUS law, which aims to establish a federal framework for regulating U.S. stablecoins. Barr pointed out that while the law is an improvement, it leaves several key gaps that could lead to confusion and increased risks for consumers and the broader financial system. He emphasized the need for coordination between federal and state agencies to address these issues and ensure a robust regulatory environment.
Regulatory Arbitrage Risks
Barr expressed concern over the potential for regulatory arbitrage under the GENIUS law. He warned that issuers might exploit loopholes in the legislation to argue they can conduct activities similar to what was seen with the now-defunct exchange FTX. “Unless state and federal agencies carefully coordinate, this could result in some state or federal regulators permitting a range of activities that might expose stablecoin issuers to increased risk,” Barr stated. This risk could undermine the law’s effectiveness and result in a lack of consistent oversight.
The possibility of regulatory arbitrage could lead to issuers operating in a less regulated environment, which might increase the likelihood of market instability. Without proper coordination, different regulators may create conflicting rules that fail to protect consumers or the financial system at large.
Gaps in Coverage for Certain Stablecoin Products
In addition to regulatory arbitrage, Barr pointed out that the GENIUS law does not cover all stablecoin products. Some stablecoins may be overlooked, leaving them unregulated and potentially confusing consumers who believe they are protected by the law. Barr emphasized that these gaps could cause consumers to rely on payment instruments that lack the necessary prudential protections.
“Consumers may be misled into thinking that all stablecoins are subject to the same protections, which is not the case,” Barr explained. He urged lawmakers and regulators to clarify these issues to prevent consumer confusion and ensure that all stablecoin products are adequately regulated.
Key Provisions of the GENIUS Law
The GENIUS law requires stablecoins to be fully backed by U.S. dollars or other liquid assets, ensuring their stability and reducing the risk of a collapse. It also mandates annual audits for issuers with a market capitalization greater than $50 billion, providing transparency to users. Additionally, the law sets guidelines for foreign stablecoin issuance, helping to maintain consistent standards across borders.
Barr acknowledged that these provisions are a step forward in regulating stablecoins but warned that the law’s current framework still requires refinement. “Stablecoins will only be stable if they can be reliably and promptly redeemed at par in a range of conditions, including during stress in the market,” he said. This is crucial for maintaining public trust and preventing a situation where stablecoins lose their value under market pressure.
The Need for Federal and State Coordination
Barr stressed the importance of cooperation between federal banking agencies and state regulators to address the gaps in the GENIUS law. The law’s effectiveness relies on a clear and unified approach to regulating stablecoins. If state and federal agencies do not coordinate their efforts, the resulting inconsistencies could lead to confusion and risk for both issuers and consumers.
The Federal Reserve, which Barr represents, has a vested interest in ensuring that any stablecoin offerings operate under a sound and consistent regulatory framework. Barr’s comments underscore the need for continuous collaboration to prevent regulatory loopholes and enhance the overall stability of the financial system.
By highlighting these issues, Barr calls for a more comprehensive and cohesive approach to stablecoin regulation, which would ultimately protect consumers and the broader economy.
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