Stablecoins endanger US economy, warns Fed governor. ‘Long and painful history of private money’

Stablecoins are heading towards becoming a market worth trillions, but one Federal Reserve governor warns that it puts the US economy in peril.

In an address to the Federalist Society in Washington on Tuesday, Michael S. Barr invoked the ghost of 1800s bank runs to illustrate the dangers he sees in the new digital monies.

“Caution is warranted because we have a long and painful history of private money created with insufficient safeguards,” Barr warned.

Commenting on the Genius Act, he drew a straight line from the core psychology behind 19th-century banking panics to today’s digital dollars.

“These same run dynamics occurred in modern times” he said, referring to the 2008 crisis and Covid-19 panic that shocked the financial system.

Barr’s warning lands at a pivotal moment for the booming industry. Stablecoins have grown over 50% since January 2025 to become a market worth $316 billion, according to DefiLlama data.

Earlier this week, British bank Standard Chartered forecasted the sector could quintuple to $2 trillion by 2028. Back in November, US Treasury Secretary Scott Bessent projected that stablecoins are on track to reach $3 trillion by 2030.

The crypto industry has celebrated the growth as evidence of how decentralised finance and blockchain solutions are becoming mainstream, but Barr warns that stablecoins jeopardises the stability of the US economy.

After all, it’s happened before.

“The particularly severe Panic of 1907, which featured a run on trust companies that offered deposit products backed by less liquid assets, led eventually to the creation of the Federal Reserve System in 1913,” he stressed.

Not so stable?

Stablecoins are stable only if they can be redeemed at par to the dollar, promptly and reliably, even in periods of market stress.

“At the same time, stablecoin issuers have an incentive to maximise the return on their reserve assets by extending the risk spectrum as far out as possible,” Barr said. “That incentive can increase profits in good times but risks undermining confidence during market stress.”

Stablecoins themselves have been subject to valuation pressures in recent years, Barr warned, citing history as showing that private money tends to flourish in good times and fracture under panics.

From the 1800s Free Banking Era to the Panic of 1907, and even the modern strains on money market funds during the Global Financial Crisis and the Covid-19 pandemic, redemption promises have cracked when people’s confidence faltered, he said.

“The quality and liquidity of stablecoin reserve assets are critical to their long-run viability,” he said.

Illicit financing concerns 

Barr also flagged money laundering and terrorist financing risks since stablecoins can circulate in secondary markets without robust customer identification typically required by traditional banking institutions.

“Both regulatory and technological solutions will need to be deployed to limit these risks,” he said.

Highlighting these concerns, Russian and Iranian groups are using stablecoins to purchase military drones, according to a Monday report by the blockchain analytics firm Chainalysis.

The trend towards using stablecoins rather than Bitcoin “reflects a broader shift in illicit crypto finance toward dollar-denominated cryptocurrencies, which offer the price stability suited to commercial procurement,” Chainalysis said.

“At $2,200–$3,500 per unit, a single successful fundraising campaign translates directly into battlefield capability for groups that cannot access conventional finance.”

Crypto market movers

• Bitcoin is up 2.5% over the past 24 hours, trading at $68,902.
• Ethereum is up 4.4% over the past 24 hours at $2,139.

What we’re reading 

• XRP has a lot going for it. So why is it still trading 60% below its all-time high? — DL News
• Coinbase: Fannie Mae mortgage initiative links cryptocurrency with real economy — DL News
• Cross-Border FX Startup OpenFX Raises $94 Million, Hits $45 Billion in Annual Volume — Unchained
• Bye TACO, hello NACHO — Milk Road
• Crypto networks ‘must wake up’ after Google exposes nightmare nine-minute Bitcoin break-in scenario — DL News

Lance Datskoluo is DL News’ Europe-based markets correspondent. Got a tip? Email him at [email protected].