GENIUS Act Could Shield Bitcoin From Fed Oversight, Governor Barr Warns
Federal Reserve Governor Michael S. Barr used a keynote at DC Fintech Week to reward Congress for lastly drawing strains round stablecoins—then instantly warned that the brand new legislation’s drafting may open channels for threat and regulatory arbitrage, together with a pathway for Bitcoin-linked devices to take a seat inside stablecoin reserves with solely oblique Federal Reserve visibility.
Bitcoin May Exploit Loophole In GENIUS Act
Speaking in Washington on October 16, Barr said “funds innovation is accelerating,” and acknowledged that the newly enacted GENIUS Act “gives some readability to issuers of stablecoins about how they will match into the regulatory and supervisory framework,” doubtlessly rushing growth of latest fee merchandise. But he confused that “success in undertaking these targets will rely on the small print of regulatory implementation,” including bluntly: “Regulators have a variety of work to do to implement the act.”
The most pointed warning got here in Barr’s dialogue of what the statute now counts as permissible reserve property for fee stablecoins. The GENIUS Act’s core security mechanism is to limit reserves to an inventory of high-quality, liquid devices. Yet the textual content additionally permits reserves fashioned through in a single day repurchase agreements backed by “any medium of trade approved or adopted by a overseas authorities.”
Barr highlighted the sensible consequence with a concrete instance: “For instance, till fairly just lately, El Salvador handled Bitcoin as authorized tender, and it nonetheless particularly permits Bitcoin for use for transactions on a voluntary foundation. As a consequence, an issuer may argue that Bitcoin repo may qualify as an eligible reserve asset for a stablecoin.”
He cautioned that if Bitcoin costs “had been to drop sharply in worth, a stablecoin issuer may very well be caught holding the Bitcoin that had declined in worth, doubtlessly compromising the one-to-one backing of the stablecoin liabilities,” concluding that “to the extent attainable, laws needs to be put in place to get rid of or decrease such dangers.”
Barr’s Bitcoin instance ties on to his broader concern: the GENIUS Act creates a mosaic of overseers—4 federal businesses plus each state and territorial regulator can function main supervisor of permitted stablecoin issuers.
Not Only Bitcoin: More Crypto Risks
In his view, that multiplicity risks creating uneven interpretations of the legislation’s guardrails and incentives for “constitution selection” that would blunt federal prudential intent. “There is likely to be an excessive amount of heterogeneity within the regulatory frameworks that apply to permitted issuers… The ensuing array of constitution selection choices, except rigorously managed, might present incentives for regulatory arbitrage,” he mentioned.
Beyond the foreign-authorized medium-of-exchange clause, Barr flagged different reserve-design openings that would transmit stress. He famous that the GENIUS Act permits uninsured deposits to rely as permissible reserves and recalled their position as a “key threat issue throughout the March 2023 banking stress.” The legislation empowers regulators to restrict concentrations in such deposits, he mentioned, however “it should matter how these guidelines are written.”
His critique prolonged to scope and construction. The statute empowers federal and state regulators to authorize a variety of actions for stablecoin issuers—“digital asset service supplier” and “incidental” companies past pure issuance. Barr warned that issuers “are more likely to search to stretch these actions limitations,” even to the purpose of arguing they might “carry out the complete vary of activities conducted by FTX,” offered they make sure representations and keep acceptable accounting. That breadth, he instructed, may depart some issuers working with threat profiles far afield from slender funds capabilities whereas escaping consolidated capital regimes if housed in trust-chartered entities—an echo of historic vulnerabilities.
On capital, Barr argued the legislation’s issuer-level necessities may show “too slender” as soon as companies department into these further strains, notably when the act carves bank-affiliated issuers out of consolidated capital protection. “Appropriate capital necessities are one other space the place coordination amongst federal and state regulators is vital,” he mentioned, including that the statute’s customary for judging whether or not state guidelines are “considerably comparable” to federal necessities will matter in observe.
He additionally pressed on consumer-protection gaps. The act doesn’t sweep in all devices generally marketed as “stablecoins,” permitting sure dollar-denominated tokenized merchandise to stay outdoors the brand new regime. That omission, Barr warned, dangers complicated customers into believing they’re protected when “there are not any prudential protections of any sort.” He urged federal and state enforcers to make use of unfair-and-deceptive-practices authorities to police misrepresentations and famous the legislation lacks the fraud and unauthorized-transfer protections that apply to conventional fee rails.
At press time, Bitcoin traded at $108,973.
