By Pete Schroeder

WASHINGTON (Reuters] -Randal Qarles, former Federal Reserve regulatory chief, stated on Thursday that U.S. regulators might “unnecessarily”, hamper innovation around stablecoins if it follows recommendations made by a Biden administration work group.

Quarles, who is leaving the Fed Board of Governors this month, stated that regulators should show “reasonable constraint” on the monitoring of stablecoins. They are digital currencies whose values are linked to traditional assets, such as the dollar. Quarles said that banks should only be permitted to interact with them after certain conditions are satisfied regarding transparency, stability, and protection of consumers.

He said, “It’s clear that there is strong demand for those assets among bank customers. Well-regulated banks should allow them to engage in activities concerning these assets.” He made a virtual appearance in Washington at the American Enterprise Institute.

Quarles specifically referenced a recommendation by any stablecoin issuesrs or “wallet suppliers” that they have limited access other commercial entities. Quarles called this unnecessarily restrictive than nondigital asset rules.

In November, The President’s Working Group on Financial Markets issued a report calling on Congress for a new law to give stablecoin providers bank-like oversight.

Quarles gave his final address to the Fed and made several recommendations for the Fed following his departure. He has not been nominated by President Joe Biden.

Quarles, for example, suggested that the Fed consider relaxing its “globally systematic” capital surcharge on the largest banks of the country. This is especially important as the Fed works to implement additional global capital restrictions, known as Basel III.

According to him, the Fed would finalize the new rules after he leaves the U.S. central banking. He also said that there is no reason for the G-SIB surcharge to remain at the current high level.

The Fed could also consider using the annual results from its stress test of banks’ finances to create a consistent capital level. He also suggested that the Fed need to deal with “perverse consequences” of the current leverage requirements, which can discourage banks holding secure assets during times of stress.