On Tuesday, Federal Reserve Vice Chair for Supervision Michael Barr sounded the alarm on the proliferation of private money backed by the U.S. dollar without regulation.
Speaking at D.C. Fintech Week, Barr warned that the expansion of stablecoins—a type of cryptocurrency generally pegged to a fiat currency like the U.S. dollar—needs oversight by the U.S. central bank.
"There's obviously a lot of innovation happening in the private sector," he said to his interviewer, Georgetown Law professor Chris Brummer, while adding that the Federal Reserve has a "very strong interest" in federal regulation that allows it to approve and supervise stablecoin issuers.
The wait for legislation
With much of the crypto industry still mired in a bear market, stablecoins have offered a bright light for the beleaguered sector. Tether, the wildcat stablecoin issuer backed by the U.S. dollar, has seen its market cap rise north of $85 billion.
U.S.-based competitor USDC—a stablecoin issued in partnership between Circle and Coinbase—has still earned hundreds of millions of dollars for its parent companies, even as it has ceded market share to Tether.
Consumers turn to stablecoins for use cases from decentralized finance applications to cross-border payments. Despite their growing popularity, Congress has dragged its feet on passing legislation that would establish a framework to regulate dollar-backed digital currencies. While the House Financial Services Committee advanced a bill backed by Chair Patrick McHenry (R-N.C.), his efforts at bipartisan support were thwarted by his one-time partner, ranking member Maxine Waters (D-Calif.)
In his remarks on Tuesday, Barr implored Congress to act. He noted that stablecoins connected to fiat currency like Tether and USDC act as private money, which he argued needs to be "well-regulated" to avoid potential risks to financial stability.
"It borrows the trust of the Federal Reserve in its issuance," Barr said.
Barr has previously called for comprehensive stablecoin regulation, including in prepared remarks delivered at a D.C. event in late October.
CBDC debate
The other hot-button issue for the Federal Reserve is central bank digital currencies—a divisive alternative to stablecoins that would be issued by the government, rather than by private companies.
Barr previously has said that the Federal Reserve is weighing the need for CBDCs, although it hasn't yet reached a decision. On Tuesday, he reiterated that position, telling Brummer the central bank was still in the research phase.
"We haven't made a decision on whether it would be a good idea or not a good idea," he said.
Although other countries have begun to adopt CBDCs, the proposition has drawn criticism among lawmakers, especially within the Republican party. Tom Emmer (R-Minn.), the Republican whip and a member of the House Financial Services Committee, reintroduced a bill in September to block the issuance of a CBDC.
On Tuesday, Barr said that the Federal Reserve would only move forward with a consumer-focused CBDC if it had clear authorization from both Congress and the executive branch.
