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.
“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.”
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.
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.
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.
