Federal Reserve Governor Barr Highlights Stablecoin Vulnerabilities Under GENIUS Act

Executive Summary

Federal Reserve Governor Michael Barr has identified significant vulnerabilities within the stablecoin market, specifically referencing the implementation of U.S. stablecoin regulations under the GENIUS Act. Barr's remarks underscore the potential for "run risk" stemming from stablecoins backed by liquid liabilities and potentially volatile assets.

The Event in Detail

Governor Barr explicitly cited uninsured deposits and "overnight repo" involving assets like Bitcoin as problematic reserve components. He highlighted that even permissible reserve assets under the GENIUS Act are not immune to stress, drawing parallels to the March 2023 banking instability where uninsured deposits posed a key risk factor. Barr warned that should Bitcoin experience a sharp decline in value, a stablecoin issuer holding such assets could compromise the one-to-one backing of its stablecoin liabilities. Furthermore, he expressed concern over regulatory arbitrage, where stablecoin issuers might navigate federal and state regulatory frameworks to find the least strict oversight, potentially leading to systemic risks akin to those observed with AIG in 2008.

The GENIUS Act, passed in July 2025, aims to provide a federal framework for stablecoins, mandating 1:1 reserves and public disclosures. The act's primary tool to mitigate run risk is limiting permissible reserve assets to an itemized list of highly liquid assets. However, Barr stressed that successful implementation depends on how these rules are written, particularly regarding the ability of regulators to limit the concentration of reserve assets in uninsured deposits and to prevent the inclusion of volatile assets under the guise of "mediums of exchange authorized or adopted by a foreign government."

Market Implications

Barr's warnings introduce an element of caution into the stablecoin market, leading to increased scrutiny on reserve compositions and a potential "flight to quality" towards stablecoins perceived as more robustly backed and compliant. The eventual regulations are anticipated to reshape the stablecoin ecosystem, potentially increasing operational costs for issuers and influencing the competitive landscape between U.S.-regulated and offshore stablecoins. While potentially leading to a more stable and resilient environment, this could also entail tighter controls. The stablecoin market has already surpassed $300 billion in total supply, driven by factors like the GENIUS Act providing regulatory clarity. Projections indicate the market could reach $2 trillion by 2028 if regulatory stability continues.

Expert Commentary

Circle General Counsel Flavia Naves largely concurred with Barr's concerns, emphasizing the necessity for robust rulemaking. Naves cautioned against imposing traditional banking constructs on stablecoin issuers, suggesting such an approach could inadvertently stifle the industry. She stated, "Trying to place the existing constructs of Traditional Banks on stablecoin issuers may have the effect of simply banning the entire industry altogether." This perspective highlights the industry's desire for clear, tailored regulations that foster innovation while mitigating risk.

Broader Context

Regulators face the challenge of coordinating across federal and state agencies to develop a comprehensive set of rules that fill existing gaps and establish robust guardrails for stablecoin users and the broader financial system. The GENIUS Act permits four federal agencies and agencies in each state and territory to serve as primary regulators, which could lead to heterogeneity in regulatory frameworks despite provisions intended to ensure substantial similarity. This potential for varied oversight underscores Barr's concern about regulatory arbitrage. The stablecoin market is currently dominated by Tether's USDT and Circle's USDC, which together hold an 85% market share. In August 2025, Tether's USDT generated $148.99 million in weekly revenue from its $173 billion supply (58% of the total stablecoin market), while Circle's USDC generated $49.25 million from its $74 billion supply. The clarity provided by the GENIUS Act has already accelerated institutional participation, with major financial institutions exploring stablecoin-based payment solutions. However, the Federal Reserve's continued focus on risk management indicates an ongoing effort to balance innovation with financial stability concerns.