Federal Reserve Governor Michael Barr warned Tuesday that stablecoins present money laundering and financial stability risks, citing a "long and painful history of private money created with insufficient safeguards" as stablecoin issues stall progress on the Clarity Act in Congress.

The Reserve Asset Risk

Barr focused his concerns on how stablecoin issuers manage reserves backing their tokens.

"The quality and liquidity of stablecoin reserve assets are critical to their long-run viability," Barr said in prepared remarks for the Federalist Society.

"At the same time, stablecoin issuers have an incentive to maximize the return on their reserve assets by extending the risk spectrum as far out as possible," he added.

He warned that stablecoins will remain stable only if they can be reliably and promptly redeemed at par across a wide range of conditions, including during market stress that can pressure the value of otherwise liquid government debt and during strain on individual issuers.

Barr pointed out that issuers have a financial incentive to maximize returns, which could lead companies to take on more risk when managing the assets backing stablecoins.

This creates a structural tension between profitability and stability.

The Genius Act Implementation

The Fed and other regulators are writing implementation rules for the Genius Act, which Congress passed last year requiring stablecoin issuers to formally register and hold dollar-for-dollar reserves.

Barr said tight control over reserve assets, coupled with supervision, capital requirements, and liquidity standards, could enhance stability and make stablecoins more viable payment instruments.

However, he emphasized that success depends entirely on how regulators implement these details.

He acknowledged stablecoins can settle payments in seconds compared to wire transfers that take several business days, helping firms with treasury functions and remittance transfers.

The Clarity Act Roadblock

Barr's warning comes as stablecoin disputes keep lawmakers from agreeing on new Clarity Act drafts.

Banks and crypto firms are clashing over digital asset regulations, particularly regarding access to bank charters.

Last October, Barr said the Genius Act would help prevent bank runs on stablecoins, but federal agencies and states must collaborate on rules to fill significant gaps protecting users and reducing financial system risks.