Regulators are reportedly sounding the alarm over stablecoins, fearing they are poorly understood and could be used to launder money

• Government recently warned stablecoin makers that many consumers don't get that the tokens could lose them money, Bloomberg reported Wednesday.
• Regulators also fear stablecoins could be used to sidestep the formal banking system, letting criminals launder money with impunity.
• The shakiness of stablecoins poses a problem for crypto more broadly.

Regulatory concern is mounting over stablecoins, digital money pegged to fiat currencies, as officials worry they could be used to dupe consumers or enable money laundering.

According to a report from Bloomberg, officials in the Biden administration recently warned stablecoin makers that many consumers are not aware that the dollar-linked tokens are not federally insured and could result in losses on their investments.

The report, citing a person familiar with the matter, says regulators also fear stablecoins could be used to sidestep the formal banking system, letting criminals launder money with impunity.

Scrutiny of stablecoins has been building for months, even as the Federal Reserve is considering issuing its own digital currency backed by the central bank.

In a speech last month, Fed Governor Lael Brainard echoed the worries aired in the Bloomberg report, noting that stablecoins - essentially a form of privately issued money - introduce the risk that the private issuer defaults. That could harm consumers and destabilize the financial system, Brainard said.

Stablecoins, which are in principle backed one-to-one by US dollars, have often appeared wobbly. In February, New York Attorney General Letitia James banned New Yorkers from trading in Tether, the market's largest stablecoin, after an investigation revealed Tether's purported one-to-one backing was not so.

In a statement to Bloomberg, Tether said the company "embraces transparency and regulation" and was not presently accepting US customers.

The shakiness of stablecoins poses a problem for crypto more broadly. Because stablecoins provide an easy way for traders to move between crypto and dollars, they have become a key source of liquidity to the crypto market - notwithstanding their imperfect pegs to the dollar.

Crypto-related money laundering fears were reinforced earlier this month when a UK financial regulator warned a "significantly high" number of crypto firms were not adhering to anti-money laundering requirements.

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