Fed proposes bank-style stablecoin rules, but Barr flags an AML enforcement gap

On Thursday (September 24), the Federal Reserve Board requested input from the public on two proposals that would move the payment stablecoin issuers it supervises to a more banking-like regulatory structure.

The proposed regulations would require that issuers maintain a full reserve backing, adhere to fixed capital requirements, ensure safe custody, and get proper approval following procedures under the GENIUS Act.

According to the Fed, the comment period of 60 days will begin upon publication of the two proposals in the Federal Register. The proposals are crucial both to banks that plan to issue stablecoins and to the Treasury and regulators who are working to execute the law.

Nevertheless, Governor Michael S. Barr expressed a concern that although he is in favor of the reserve and capital measures, the new anti-money-laundering (AML) proposal may limit the Fed’s capacity to act appropriately.

Full backing, capital and a tailored approval path

According to the proposals, payment stablecoin issuers regulated by the Board will be required to have sufficient backing by eligible assets, such as short-term Treasuries and other high-quality liquid assets.

The framework also outlines standardized capital and risk management requirements, reserve-custody rules, and customized approval systems for the supervised banks seeking to issue stablecoins.

The proposed reserve and capital requirements by the Fed address some of the regulatory shortcomings pointed out in a Brookings paper by Nellie Liang and Brent Neiman. They stated that regulators still needed strong capital and liquidity regulation to allow for redemption at par, and reserves held in uninsured bank deposits should bear more capital requirements than Treasury bills or cash. The GENIUS Act mandates at least a one-to-one backing with eligible reserves.

Applicants are required to present a business plan alongside financial documentation as part of the approval system, which includes procedures for appeals, hearings, and decisions.

Why Barr sees an enforcement tension

Barr tied the stablecoin package to the Fed’s July proposal to revise bank AML program requirements. That proposal says supervision and enforcement would focus on “significant failures” after a bank establishes an AML program.

According to Barr’s statement, it is unclear how such a “significant or systemic” threshold might impact the Fed’s capacity for action.

I am concerned that the ‘significant or systemic’ standard may have unknown effects…

— Michael S. Barr, Federal Reserve

This concern has arisen as regulators are broadening stablecoin compliance regulations. Cryptopolitan reported in May that the FDIC encouraged the application of AML, counter-terrorist-financing, and sanction requirements to stablecoin issuers affiliated with banks.

Liang and Neiman have also cautioned that if stablecoins are not processed through correspondent banking networks, U.S. sanctions and AML powers of enforcement may be diluted unless issuers and wallet operators are able to prevent illegal transactions.

What tighter rules could do to Treasuries and issuer economics?

The size of the stablecoin market can no longer be overlooked. According to a May report published by the Bank for International Settlements, the total value of the market is about $300 billion in 2026, with 98% of this amount denominated in US dollars.

Brookings Institute estimates the stablecoin market to be worth around $270 billion in June. According to S&P Global Market Intelligence, the value will reach $434 billion by 2028 from $269 billion in 2025, with major applications seen in cross-border payments, treasury management, and capital market tokenization.

The flow of stablecoin reserves into Treasury bills may drive demand for short-term US securities, but Brookings emphasized that the total effect depends on what is causing the increase in stablecoin reserves. Additionally, stricter capital and custody regulations may make compliance more difficult and therefore increase barriers for new issuers.

The effects reach beyond stablecoin issuers. Analysts at the International Monetary Fund (IMF) found that existing payment companies lost 1.3% (or approximately $21.5 billion) of their market value compared to other financial companies during the critical vote on the GENIUS Act.

Cross-border firms were found to be more negatively affected. Taking into consideration the effects already anticipated by the market, the losses at the moment may amount to as high as 13% to 27% (approximately $220 billion to $470 billion).

The arbitrage question other jurisdictions face

Cross-border consistency remains a challenge. A June BIS review found stablecoin regulation fragmented across jurisdictions and warned that uneven implementation can create regulatory-arbitrage opportunities and complicate supervision.

Demand has also held up despite the broader downturn. Chainalysis reported that global on-chain crypto activity slipped only 1.6%, from $9.5 trillion to $9.4 trillion, even as total crypto market capitalization fell about 50%. It ranked Brazil first for grassroots adoption and linked Latin America’s growth partly to stablecoin use as a hedge against currency volatility.

The Treasury says January 18, 2027, is the expected effective date. Under the statute, the GENIUS Act can take effect earlier—120 days after primary federal stablecoin regulators issue final implementing rules. That timetable helps explain why agencies, including the Fed, are moving now.