Federal Reserve Governor Michael S. Barr used a keynote at DC Fintech Week to praise Congress for finally drawing lines around stablecoins—then immediately warned that the new law’s drafting could open channels for risk and regulatory arbitrage, including a pathway for Bitcoin-linked instruments to sit inside stablecoin reserves with only indirect Federal Reserve visibility.
The most pointed warning came in Barr’s discussion of what the statute now counts as permissible reserve assets for payment stablecoins. The GENIUS Act’s core safety mechanism is to restrict reserves to a list of high-quality, liquid instruments. Yet the text also allows reserves formed via overnight repurchase agreements backed by “any medium of exchange authorized or adopted by a foreign government.”
Barr highlighted the practical consequence with a concrete example: “For example, until quite recently, El Salvador treated Bitcoin as legal tender, and it still specifically permits Bitcoin to be used for transactions on a voluntary basis. As a result, an issuer could argue that Bitcoin repo could qualify as an eligible reserve asset for a stablecoin.”
He cautioned that if Bitcoin prices “were to drop sharply in value, a stablecoin issuer could be stuck holding the Bitcoin that had declined in value, potentially compromising the one-to-one backing of the stablecoin liabilities,” concluding that “to the extent possible, regulations should be put in place to eliminate or minimize such risks.” Barr’s Bitcoin example ties directly to his broader concern: the GENIUS Act creates a mosaic of overseers—four federal agencies plus every state and territorial regulator can serve as primary supervisor of permitted stablecoin issuers.
Beyond the foreign-authorized medium-of-exchange clause, Barr flagged other reserve-design openings that could transmit stress. He noted that the GENIUS Act allows uninsured deposits to count as permissible reserves and recalled their role as a “key risk factor during the March 2023 banking stress.” The law empowers regulators to limit concentrations in such deposits, he said, but “it will matter how these rules are written.”
On capital, Barr argued the law’s issuer-level requirements could prove “too narrow” once firms branch into these additional lines, particularly when the act carves bank-affiliated issuers out of consolidated capital coverage. “Appropriate capital requirements are another area where coordination among federal and state regulators is key,” he said, adding that the statute’s standard for judging whether state rules are “substantially similar” to federal requirements will matter in practice.
He also pressed on consumer-protection gaps. The act does not sweep in all instruments commonly marketed as “stablecoins,” allowing certain dollar-denominated tokenized products to remain outside the new regime. That omission, Barr warned, risks confusing users into believing they are protected when “there are no prudential protections of any kind.” He urged federal and state enforcers to use unfair-and-deceptive-practices authorities to police misrepresentations and noted the law lacks the fraud and unauthorized-transfer protections that apply to traditional payment rails.
At press time, Bitcoin traded at $108,973.
