Federal Reserve Governor Michael Barr has warned that while stablecoins are easily accessible to anyone with a phone and internet connection, that same accessibility creates risks regulators have yet to fully address. Speaking at an event in Washington, D.C., Barr said that implementing adequate anti-money-laundering controls is essential for stablecoins to reach their full potential under the GENIUS Act. He pointed to secondary markets where stablecoins can be purchased without customer identification requirements as a particular vulnerability for bad actors.
“Both regulatory and technological solutions will need to be deployed to limit these risks,” Barr said, citing concerns about the potential use of stablecoins in money laundering or terrorist financing. His remarks also touched on broader financial stability risks posed by stablecoins. The comments are notable given that approximately 66% of stablecoins are held by individuals in emerging markets, where access to dollars can be costly or restricted, according to Goldman Sachs.
Nicholas Anthony, a policy analyst at the Cato Institute, told Decrypt that Barr’s references to regulatory solutions likely point to the Bank Secrecy Act, a law requiring financial institutions to help government agencies detect and prevent illicit finance. On the technological side, Anthony said it is harder to pin down exactly what Barr intends. He speculated that it could involve deploying smart contracts to automatically flag or freeze transactions in suspicious circumstances, or potentially streamlining existing financial surveillance processes.
Barr’s remarks follow a report submitted to Congress this month by the U.S. Treasury Department, which found that many financial institutions are already taking a proactive approach to managing money-laundering risks associated with digital assets. The agency noted that institutions are using AI algorithms to conduct sophisticated analysis of blockchain data, even in the absence of formal standards. The report also suggested Congress consider a “hold law” that would give institutions legal protections for freezing digital assets suspected of involvement in illicit activity during short-term investigations.
The Treasury Department specifically noted that such a law would be “particularly useful for countering illicit finance involving permitted payment stablecoins.” Separately, intergovernmental bodies such as the Financial Action Task Force have called on stablecoin issuers to implement technical measures enabling them to block, freeze, and withdraw stablecoins at any time. That organization has identified peer-to-peer transactions as a key vulnerability linked to money laundering, terrorist financing, and sanctions evasion.
Barr has raised concerns about stablecoins on prior occasions as well. In 2023, he warned that stablecoins operating without federal oversight could undermine the credibility of the U.S. central bank, which he described as the “ultimate source of credibility in money.” He also said at the time that the Fed was “a long way” from deciding whether to issue a central bank digital currency, or CBDC. This month, the Senate passed a housing bill containing a provision that would prohibit a CBDC in the United States until at least 2031.
The debate over stablecoins and illicit finance is also playing out at the state level. Conservatives have long argued that a CBDC would give the federal government excessive control over everyday transactions, yet some states are moving to expand their own oversight of stablecoin activity. A stablecoin bill recently passed in Florida, for instance, brought dollar-pegged tokens under the state’s existing anti-illicit-finance framework, introducing transaction monitoring requirements and a $10,000 reporting threshold for transactions.
Originally reported by Decrypt.
