Federal Reserve Governor Michael Barr recalled a "long and painful history of private money created with insufficient safeguards" while making the case for robust stablecoin oversight.

On Tuesday, Barr specifically addressed the Guiding and Establishing Innovation for U.S. Stablecoins Act, better known as the GENIUS Act. He noted that Congress's passing of the stablecoin legislation last year could help accelerate development, but focused largely on warning about the risks the USD-pegged tokens could pose.

Although the GENIUS Act provides a regulatory framework for key areas, Barr stressed the importance of robust implementation. In addition to calling for both regulatory and technological measures that ensure stablecoins will not be used for illicit activities, he showed concern that stablecoins could usher in financial instability if issuers and reserves are not properly monitored.

"Stablecoins will be stable only if they can be reliably and promptly redeemed at par in a wide range of conditions, including during stress in the market that can put pressure on the value of otherwise liquid government debt and during episodes of strain on the individual issuer or its related entities," Barr said.

Barr pointed out that issuers have a financial incentive to maximize returns, and this could lead to the companies taking on more risk when managing the assets used to back stablecoins.

"The quality and liquidity of stablecoin reserve assets are critical to their long-run viability," he added.

The federal regulator's comments come as issues related to stablecoins appear to be keeping lawmakers from agreeing on new drafts of the Clarity Act, another bill designed to provide more regulatory certainty around digital assets.

This is not the first time Barr has demonstrated caution as it relates to stablecoins and the GENIUS Act. Last October, Barr said passing the GENIUS Act would help alleviate the risks of runs, but it's up to the federal banking agencies and states to work together on a set of rules to fill significant gaps to protect users and decrease risks to the financial system.