Issuers of the cryptocurrency called stablecoin should be regulated like banks, said New York Attorney General Letitia James in a letter to Congress on Tuesday.

The federal government should take further measures to protect investors, she said in the letter, prompted by the Senate’s recent passage of the "Guiding and Establishing National Innovation for U.S. Stablecoins," or GENIUS Act. If passed by the House, the bill would establish regulations and consumer protections for stablecoins, a type of cryptocurrency usually pegged to the U.S. dollar.

Experts have touted federal regulation of stablecoins as a way to strengthen the U.S. dollar and bring a cyber-secure form of cryptocurrency into the mainstream. James in her letter, however, pointed out that the digital dollar has been linked to anonymous transactions used in criminal activity.

Besides regulating issuers of stablecoins like banks, Congress should also offer insurance through the Federal Deposit Insurance Corporation on stablecoin deposits, she said.

"Unregulated cryptocurrency transactions are a danger to investors, the economy, and national security. Congress must pass legislation that strengthens oversight of cryptocurrency to help stop fraud and criminal activity," said James in a news release, pointing out that many Americans have invested "millions" into cryptocurrencies, despite a functioning legal framework.

The Senate is considering a parallel bill to regulate stablecoin called the Stablecoin Transparency and Accountability for a Better Ledger Economy, or STABLE, an act that the attorney general also argued "lacks necessary guardrails," such as requiring the use of digital identification in stablecoin transactions.

Congress should also support community banks that could be undermined by stablecoins and strengthen the ability of state and federal law enforcement to combat stablecoin fraud, she said.

Mitchell O. Goldberg, president of Melville-based financial advisory firm ClientFirst Strategy Inc. said he agrees with increasing regulation on cryptocurrencies like stablecoin.

Apart from protecting investors, Goldberg said without tightened regulations, it’s possible that banks, which are currently required to maintain minimum capital ratios, might move money to stablecoin to circumvent those requirements. In so doing, he worries that in the event of another economic downturn, banks won’t have enough capital on hand and could end up looking for bailouts.

"It’s going to take trial and error to get all the regulations right," Goldberg said. "There’s going to be some we look back on in few years and see as too onerous and some that are too loose and some we haven’t thought of."

But local proponents of cryptocurrencies said the attorney general’s recommendations conflict with the existing bill.

"I have no objection to stablecoins being protected by FDIC," Craig Rudes, partner at Long Island Block Chain, a technical consulting firm for blockchain technology said in a email Tuesday. However, Rudes added that he does "not understand her mechanisms to deploy it though. If it requires stablecoins to only be issued by banks, then I do not think FDIC insurance is worth it."

"FDIC protection would be great if can be implemented without giving up sovereignty to the bank/U.S. Government," Rudes added.

Andrew Rocco, stock strategist at Chicago-based Zacks Investment Research, said Stablecoin transactions are tracked using blockchain, which is "like an Excel sheet."

"In my view, if the U.S. government wants to find someone and they’re transacting in stablecoins, they’re going to be able to because of the blockchain," he said. "But like anything else, I’m sure there are ways around it if you’re very sophisticated."

Stablecoin companies like Circle Internet Group and Coinbase have also been "seeking regulation," Rocco noted, which is "undoubtedly a positive for the industry."

After the Senate passed the GENIUS Act in June, Circle saw stocks soar and company officials praised the Senate’s passage of the bill as a "historic moment for the future of money" that will protect consumers and preserve "the strength of the U.S. dollar in the digital age."

But, while regulation of stablecoins will strengthen the U.S. dollar on the global stage, it’s important to be careful about overregulation, Rocco said. 

"So we want to regulate enough to protect investors, to ensure that their stablecoins are safe," he said, "but at the same time, we want to be the leader in crypto."