WASHINGTON—Randal Quarles, the former regulatory chief of the Federal Reserve, said on Thursday that U.S. regulators may “unnecessarily” hamper innovation around so-called stablecoins if they pursue recent recommendations put forward by a Biden administration working group. Quarles, who will leave the Fed’s Board of Governors at the end of the month, said regulators must show “reasoned constraint” on monitoring stablecoins, which are digital currencies whose value are pegged to traditional assets like the dollar. He added that banks should be allowed to engage with them once certain concerns around transparency, stability and consumer protection are met. “It is clear that there is a strong demand for these assets among bank customers, and well-regulated banks should be allowed to engage in activities regarding these assets,” he said in a virtual appearance at an American Enterprise Institute event in Washington. Quarles specifically cited a recommendation that any stablecoin issuers or “wallet providers” …