Fed's Barr Says Stablecoins Need Tighter Controls to Fight Money Laundering

In brief

• Fed Governor Michael Barr called on regulators to implement anti-money-laundering controls for stablecoins following last year’s passage of the GENIUS Act.
• He identified stablecoins’ accessibility on “secondary markets” as a key area of concern, while global watchdogs have recently focussed on peer-to-peer transfers.
• A U.S. Treasury report urged Congress this month to consider a law that would grant institutions legal protections for voluntarily freezing questionable digital assets.

Needing nothing more than a phone and internet connection to hold stablecoins may be a blessing for some, but that accessibility presents risks that regulators still need to address, according to Federal Reserve Governor Michael Barr. When it comes to implementing rules and regulations under the GENIUS Act, Barr said at an event in Washington, D.C., on Tuesday that U.S. regulators will need adequate anti-money-laundering controls in order for stablecoins to reach their full potential. “A key area of concern […] is the potential for stablecoin use in money laundering or terrorist financing, since bad actors can purchase stablecoins in secondary markets that may not have customer identification requirements,” he said. “Both regulatory and technological solutions will need to be deployed to limit these risks.” Barr’s remarks touched on financial stability risks that stablecoins may pose. Still, his focus on their accessibility cuts at a key functionality users have enjoyed for years, considering 66% of stablecoins are held by individuals in emerging markets where access to dollars can be costly or restricted, according to Goldman Sachs.

 When it comes to the regulatory solutions, Barr’s comments likely refer to the Bank Secrecy Act, a law requiring financial institutions to assist government agencies in detecting and preventing illicit finance, Nicholas Anthony, a policy analyst at the Cato Institute, told Decrypt. “On the technological front, it’s a little bit tricky to speculate exactly what he means,” he said. “If I were to guess, I would imagine it’s something about maybe deploying smart contracts to have automatic flags and freezes in concerning situations.” Anthony underscored that uncertainty, noting that Barr’s call for anti-money-laundering controls could also involve streamlining existing surveillance processes.

Barr’s assessment follows the submission of a report to Congress from the U.S. Treasury Department this month, which found that many financial institutions are taking a proactive approach toward money-laundering risks with digital assets. That includes using AI algorithms to conduct sophisticated analysis of blockchain data despite a lack of standards, the agency found. At the same time, intergovernmental agencies like the Financial Action Task Force have called on stablecoin issuers to implement technical measures to be able to block, freeze, and withdraw stablecoins at any time. The organization pointed to peer-to-peer transactions as a key vulnerability contributing to money laundering, terrorist financing, and sanctions evasion. The report submitted by the Department suggested Congress should consider a “hold law,” which would provide institutions with legal protections for freezing digital assets suspected to be involved in illicit activity during “a short-term investigation.” “Such a law would be particularly useful for countering illicit finance involving permitted payment stablecoins,” Treasury added.  Barr has at times expressed other concerns with stablecoins. In 2023, he signaled that stablecoins without federal oversight have the potential to undermine credibility in the U.S. central bank, which is recognized as the “ultimate source of credibility in money,” he said. Barr said at the time that the Fed was “a long way” from determining whether the U.S. central bank would issue a central bank digital currency (CBDC). This month, the Senate passed a housing bill including a provision outlawing a CBDC in the U.S. until at least 2031. Conservatives have long argued that a CBDC would empower the federal government to exert more control over everyday transactions, yet some states are crafting laws that expand their own power when it comes to policing stablecoin transactions. A stablecoin bill that recently passed in Florida, for example, looped dollar-pegged tokens into the state’s existing rules to combat illicit finance. The provisions include transaction monitoring requirements and a $10,000 reporting threshold for transactions.