Fed Governor warns $316B stablecoin market prone to run risks

Federal Reserve Governor Michael S. Barr warned in Washington on Tuesday that the $316 billion stablecoin market could be vulnerable to bank-run dynamics and poses money-laundering and terrorism-finance risks. He delivered the remarks at a Federalist Society event.

Barr drew on the history of private money during the 1800s and early 1900s, along with more recent market strains. “Caution is warranted because we have a long and painful history of private money created with insufficient safeguards,” he noted, pointing to the Free Banking Era and the Panic of 1907, which preceded the creation of the Federal Reserve in 1913. He also referenced the 2008 financial crisis and the market stress during the Covid-19 pandemic.

Barr said trust can unravel if people doubt they can redeem tokens one-for-one for dollars when markets are under pressure. He argued stablecoins are only “stable” if redemptions at par are fast and dependable, even in stress. He warned issuers may chase higher returns by taking more risk with their reserves, boosting profits in calm periods but eroding confidence when conditions worsen. He added that the strength and liquidity of those reserves are essential for the long-term durability of the tokens.

Barr also flagged illicit-finance exposure. He noted that stablecoins can change hands in secondary markets without the customer checks typical in banking. “Both regulatory and technological solutions will need to be deployed to limit these risks,” he said.

A new analysis from Chainalysis underscored those concerns, reporting that Russian and Iranian groups are using stablecoins to acquire military drones. The firm wrote that a preference for dollar-pegged tokens over Bitcoin “reflects a broader shift in illicit crypto finance toward dollar-denominated cryptocurrencies, which offer the price stability suited to commercial procurement.” Chainalysis estimated drone prices at $2,200 to $3,500 per unit and concluded that “a single successful fundraising campaign translates directly into battlefield capability for groups that cannot access conventional finance.”

Stablecoins have expanded more than 50% since January 2025 to reach $316 billion, based on DefiLlama data. Standard Chartered has projected the stablecoin market could reach $2 trillion by 2028. In November, Treasury Secretary Scott Bessent projected $3 trillion by 2030.

Regulation remains unsettled. Barr cautioned that rapid growth, issuers’ reserve choices, and operational risks could transmit stress to the broader financial system if redemptions spike.

Crypto markets were firmer over the past day. Bitcoin rose 2.5% to $68,902, while Ethereum advanced 4.4% to $2,139.