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- Federal governor Michael Barr raised concerns about stablecoins.
- He acknowledged the benefits of innovation, but flagged risks related to "the fragility of private money."
- The stablecoin ecosystem within the wider crypto space has boomed this year.
A top central bank official has some concerns about a booming corner of the cryptocurrency market.
Speaking at DC Fintech Week on Thursday, Federal Reserve Gov. Michael Barr said he had some concerns about stablecoins and their effect on broader financial stability. While he acknowledged the benefits of innovation in payments that the fiat-backed crypto coins offer, he said the creation of private money presents unique risks.
"Looking at the long history of runs from private money is a helpful reminder of how these runs can happen and what's at stake when they do,"Barr said, pointing to examples from history when the US had competing forms of money issued by banks.
Since the Senate passed the landmarkGENIUS Actearlier this year, commentators have predicted that stablecoins could revolutionize payments. Retail giants like Walmart and Amazon have reportedly considered issuing their own payment stablecoins, and the legislation could allow for a wave of new issuance among private companies.
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Barr praised the recent regulation for increasing clarity for stablecoin issuers, but he was also quick to point out that the market is still mostly unregulated and susceptible to runs.
"The fragility of private money is inherent in the way that it is created," he stated. "Financial institutions issue liquid liabilities to the public that are redeemable on demand and at par, but issuers risk being ultimately unable to liquidate their assets promptly at par when facing run dynamics and market stress."
He added that the stablecoin market has already seen run dynamics impact the market.
"Unregulated stablecoins are currently backed by a range of non—cash reserve assets that can make them vulnerable, especially under stressed conditions," he said.
Barr isn't the only economic expert to warn of stability risks involving stablecoins recently. A semiannualreportfrom the International Monetary Fund said that the run risks could impact other markets, such as bank deposits and government bonds, while others have warned that an explosion of stablecoin issuance could cause a spike involatility in US Treasurys.
