Federal Reserve Governor Michael Barr warned on Tuesday that stablecoins pose risks related to money laundering, financial stability, and reserve quality, as U.S. banking agencies work on regulations to implement new federal rules for the sector, Bloomberg reported.

Barr cautioned that issuers have an incentive to stretch for higher returns by moving further out on the risk spectrum with reserve assets, a dynamic that could undermine confidence in the tokens and amplify stress if users rush to redeem them, Bloomberg said. His comments come as the Federal Reserve and other regulators draft rules under the Genius Act, which requires stablecoin issuers to register formally and maintain dollar-for-dollar reserves.

While Barr acknowledged benefits for digital assets, including treasury management and remittances, his remarks centered on the need for strict safeguards. He said tight control over reserve assets, combined with supervision, capital and liquidity requirements, and other measures could make stablecoins more stable and more viable as payment instruments, according to the report. 

Barr stressed that whether that framework works in practice will depend on the details of implementation, as regulators seek to contain money-laundering exposure and other risks while the fight between banks and crypto firms over digital-asset oversight continues, the news outlet said.

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