There has been considerable buzz surrounding stablecoin and its growing need for regulation. From the US to India, all major economies are eager to be at the forefront of the global race. The latest GENIUS Act, passed by the US Senate, would be the first comprehensive regulatory framework for payment stablecoins. Although it is proposed to lower borrowing costs, the Act has been criticised for being “written by and for the crypto industry” putting consumers second. This presents India with a goldmine of an opportunity to step up and draft a regulatory framework that not only equally favours fintech industries and users, but also taps into our talent reserve.
In this blog, we dive deep into understanding stablecoin and its implications for the Indian Fintech ecosystem.
Let’s take it to the basics: What exactly is a stablecoin?
Stablecoins are cryptocurrencies designed to maintain a stable value by pegging to an external reserve asset (typically a fiat currency or commodity). In practice, most stablecoins hold one-to-one reserves of a fiat currency (e.g. the US dollar) or asset like gold to “lock in” their value. This makes them act as a medium of exchange (unlike volatile coins like Bitcoin), while leveraging blockchain’s speed and transparency. For example, the World Economic Forum notes that stablecoins “maintain a steadier value” than other cryptos by being linked to underlying assets. In 2024, stablecoins facilitated about \$27.6 trillion in transactions – more than Visa and Mastercard combined – underscoring their scale as payment rails. Most existing stablecoins (around 99% by market share) are pegged to the US dollar, though variants pegged to the euro, yen or other assets also exist.
Evolution of Cryptocurrency: Bitcoin and Stablecoins
The crypto landscape began with Bitcoin (launched 2009) and a host of volatile “altcoins.” Stablecoins emerged around 2014 to solve Bitcoin’s volatility, offering blockchain-based tokens with predictable value. As crypto adoption grew, stablecoins became integral: Tether (USDT) alone now has a market cap over \$140 billion, and USD Coin (USDC) over \$58 billion. Unlike Bitcoin (often viewed as digital gold or speculative asset), stablecoins behave more like traditional currency on-chain, so they are widely used for trading, payments and DeFi. They are even augmenting conventional finance: large financial firms (Visa, Mastercard, JPMorgan, etc.) are building stablecoin offerings, and top US banks plan to issue their own dollar-pegged tokens amid new regulation. Globally, the stablecoin market has grown to over \$200 billion by late 2024. This boom has drawn sharp regulatory attention: central banks warn that unregulated stablecoins could pose systemic risks to financial stability and monetary sovereignty.
Stablecoins vs. Central Bank Digital Currencies (CBDCs)
Stablecoins differ fundamentally from CBDCs (government-issued digital currencies). A CBDC is a digital form of a country’s fiat currency issued by its central bank and carries the same legal tender status (like physical cash). For example, India’s Digital Rupee (e₹) is a sovereign CBDC issued by the RBI on blockchain, with RBI guarantees and the same face value as paper rupees. In contrast, stablecoins are privately issued tokens backed by reserves (not by government decree). They may be fully collateralised (e.g. one dollar per token in reserves) or algorithmic, but no law makes them legal tender. As PwC notes, “CBDCs are government-backed digital versions of central bank currencies, while stablecoins are privately-issued digital currencies designed to maintain a stable value often by pegging to other assets”. Key differences include: issuance (CBDCs by central bank vs. stablecoins by banks or firms), backing (CBDCs by monetary authority vs. stablecoin reserves), and legal status (CBDCs are official tender; stablecoins are not). For example, India’s RBI digital rupee is explicitly a liability of the RBI (issued like banknotes), whereas a private rupee-pegged stablecoin would be a blockchain token created by a company. Importantly, central banks see stablecoins as a challenge to sovereignty: BIS and ECB officials warn that widespread dollar-backed stablecoin use could dilute control of monetary policy (spurring moves toward digital euros or yuan).
Digital Rupee vs. Stablecoins
India’s Digital Rupee (e₹), launched as a pilot in late 2022, is a retail CBDC: it’s literally the Rupee in digital form, issued and guaranteed by the RBI. It functions like cash in a digital wallet, preserving RBI’s finality of settlement. Since the e₹ is pegged 1:1 to the rupee and fully backed by RBI reserves, it is a stable asset by design. In contrast, any rupee stablecoin would be a privately issued cryptocurrency token pegged to the rupee (or other asset) with reserves held by that issuer. The issuers of stablecoins can be banks or fintech firms (e.g. the US Senate’s GENIUS Act envisions banks issuing digital dollars), but issuance is not restricted to a single authority. In terms of legal tender, the Digital Rupee is legal tender like cash, while stablecoins are not recognised as official currency. Thus, using a stablecoin for payment is legally akin to using a private payment instrument (subject to foreign exchange rules), whereas using the e₹ is using sovereign currency.
India’s Position in the Stablecoin/CBDC Landscape
India has been cautious with cryptocurrencies and stablecoins. The RBI has repeatedly warned that crypto assets (including stablecoins) pose risks to monetary policy and stability. India currently has no regulatory framework formally authorising private stablecoins. In practice, Indians trade global stablecoins like USDT and USDC on crypto exchanges (as virtual digital assets), but these are subject to high taxes (30% plus 1% TDS) and fall into legal grey areas. By contrast, India is leading in CBDC development: PwC’s 2023 CBDC Index ranks India first due to its digital rupee pilots and an expected full launch. The RBI launched the retail e₹ pilot in Dec 2022 and has since added features (like offline transfer). According to authorities, India’s rapid fintech growth (UPI, Aadhaar) gives it strong infrastructure to leverage a digital rupee and even regulated rupee-pegged stablecoins. Some analysts argue India is a “sleeping giant” in virtual assets whose talent and diaspora could drive innovation if given clarity.
Potential Benefits of Stablecoins for India
A regulated stablecoin framework could unlock several advantages for India. Remittances are a prime use case: India receives ~$100 billion annually from its 36 million diaspora, often via slow and costly traditional channels. Stablecoins could enable near-instant, peer-to-peer transfers. For example, a migrant worker could convert dollars to a rupee-backed stablecoin in the US, send it to a recipient’s wallet in India, who then redeems it for rupees at very low cost. This could slash fees (current ~$12.7 on $200 transfers) and speed up payments for underbanked families. Stablecoins also facilitate tokenized government debt. The US Senate’s stablecoin bill highlights that dollar-based stablecoins could become large buyers of US Treasury bills, which India could emulate with rupee debt. In theory, a tokenized RBI bond could be held by a rupee stablecoin issuer, attracting domestic and global investors. Moreover, integrating a regulated rupee stablecoin with India’s digital public infrastructure (UPI/Aadhaar) could enhance financial inclusion and export competitiveness. Analysts suggest that pairing the e₹ with regulated rupee-pegged stablecoins could create a hybrid ecosystem (ensuring on-chain compliance while leveraging blockchain for efficiency).
- Cross-border payments: By eliminating correspondent banks, stablecoins reduce remittance costs and settlement times. In India’s context, leveraging its vast UPI/Aadhaar system (900 million users) could support fast, KYC-compliant stablecoin transfers.
- Financial inclusion: India’s e₹ and stablecoins could give cash-like digital money to people without bank accounts. This broadens access to savings and loans.
- Monetization of savings: Safer than other crypto, a RBI-regulated stablecoin could let Indians earn returns on sovereign liabilities, potentially helping to preserve savings against inflation.
Government Concerns and Challenges
Policymakers remain wary of stablecoins. The RBI warns that broad crypto adoption (including stablecoins) could undermine monetary policy and financial stability. As Business Standard reports, RBI’s Financial Stability Report cautions that crypto growth might reduce policy effectiveness and worsen fiscal risks. BIS echoes this globally, noting unregulated stablecoins “pose a risk to financial stability and monetary sovereignty”. Key concerns include:
- Monetary sovereignty and currency substitution: An abundance of dollar-based stablecoins could weaken demand for the rupee abroad, making India more vulnerable to external currency fluctuations. Major central banks fear “digital dollarisation” and see stablecoins as a challenge to their control.
- Regulatory arbitrage: Without clear rules, investors may flock to off-shore stablecoins, potentially evading India’s capital controls. Under FEMA, stablecoin remittances are in a gray area – RBI could deem them unauthorized foreign exchange.
- Consumer protection and AML: Peer-to-peer crypto transfers can skirt traditional KYC/AML checks. The Indian Supreme Court already warned the sector could become a “refined form of hawala” without regulation.
- Financial stability risks: Sudden redemptions (a “run” on a stablecoin) could force rapid asset sell-offs, echoing Terra’s collapse in 2022. The IMF/FSB also noted stablecoins have “potential run risks” if their backing is opaque.
- Technical challenges: Ensuring blockchain networks scale securely is non-trivial. RBI and banks must bolster cyber‐security around any crypto infrastructure.
Given these issues, the Indian government has been cautious. No stablecoin framework has been passed yet; instead India is focusing on its CBDC and issuing directives to crypto exchanges (e.g. requiring them to register and pay taxes on all crypto transactions).
Regulation and Policy Options
Regulators are exploring ways to address stablecoins. Internationally, frameworks are emerging: the U.S. Congress is advancing bills (e.g. the GENIUS and STABLE Acts) to license and regulate dollar stablecoins. The EU’s MiCA law already covers fiat-backed stablecoins with strict reserve requirements. In India, experts suggest aligning with IMF/FSB guidance. The FSB has released recommendations that large “global stablecoins” must have robust legal claims, transparency, and oversight.
Possible regulatory approaches for India include:
- Licensing and reserve requirements: Grant licenses only to regulated banks/fiat institutions to issue rupee stablecoins, with mandatory collateral (in RBI-approved assets) covering 100% of the supply.
- Onshoring transactions: Mandate that stablecoin issuance and redemption occur through onshore entities, ensuring RBI visibility.
- Classifying stablecoins: Define stablecoins legally – e.g. as “a type of virtual digital asset” subject to FIU-IND/Tax rules. Currently, ambiguity has led to inconsistent tax notices; clarity would help compliance.
- Integration with CBDC: One proposal is RBI-regulated rupee-pegged stablecoins that complement (not compete with) the e₹. For example, RBI’s sandbox idea could allow private stablecoin projects under close supervision.
- International coordination: Being part of G20/IMF dialogues, India endorsed a global crypto policy roadmap in 2023, which advocates strong AML/KYC, coordination and sandboxing. Aligning with these would give India policy legitimacy.
In short, a balanced regulation would seek to enable innovation (so Indian fintech can compete globally) while safeguarding stability. Industry analysts emphasize that clear, “forward-thinking” stablecoin rules could attract investment and talent back to India.
Risks of a Regulatory Vacuum for India
Cross-Border Risks: Managing Capital Flows in the Stablecoin Era
Stablecoins offer easy cross-border transfers, allowing individuals and businesses to bypass capital controls. Without clear regulations, India risks outflows of capital via USD-backed stablecoins. The Reserve Bank of India has raised concerns about this undermining the rupee and domestic monetary policy.
Preserving Monetary Sovereignty in a Digitally Dollarized World
Stablecoins pegged to the US dollar can become a parallel store of value in India. In the absence of strong regulation, this could weaken the rupee’s role in domestic and international transactions. The IMF warns such trends erode monetary sovereignty in emerging markets.
Strengthening Safeguards: Addressing Financial Integrity Risks of Stablecoins
Stablecoins can be used to mask cross-border fund flows, posing risks of money laundering and terror financing. India’s lack of clarity on VDA regulation leaves gaps in compliance. The FATF and G20 have flagged stablecoins as vulnerable if AML-CFT norms aren’t enforced.
Unlocking Innovation: The Case for Policy Clarity to Attract Capital
India’s unclear policy on stablecoins discourages startups and foreign capital from entering the digital finance sector. Innovators prefer jurisdictions with defined guardrails, like Singapore or the UAE. As a result, India may lose ground as a fintech hub.
Seizing the Moment: India’s Role in Shaping Global Stablecoin Standards
As countries build frameworks for global stablecoins, India risks being a passive observer. Without regulatory clarity, India cannot shape global norms or participate meaningfully in forums like the FSB or BIS.
Building Strategic Advantage: Stablecoin Regulation as a Competitiveness Lever
Countries enabling regulated stablecoin innovation gain early-mover advantages. India’s policy vacuum may limit its global competitiveness in tokenised finance, CBDC interoperability, and digital trade settlements.
Impact on Global Currency Dynamics
The rise of stablecoins has significant geopolitical implications. Currently, the US dollar dominates stablecoin markets: the two largest issuers (Tether, Circle) issue dollar-backed tokens, and their stablecoins account for the bulk of the $200+B market. These dollar stablecoins effectively increase global demand for US Treasury bills (they hold tens of billions of dollars in T-bills) and can reinforce dollar use in international payments. Policymakers worry this could entrench dollar dominance (“digital dollarisation”) at the expense of other currencies. The ECB, for example, has explicitly tied the digital euro project to safeguarding the euro’s international role against private dollar stablecoins. China likewise is fast-tracking its digital yuan, partly as a strategic response to the US stablecoin trend.
As for the top fiat currencies (USD, EUR, JPY, GBP, CNY), each is responding differently: the US embraces bank-issued dollar stablecoins to bolster the dollar; the Eurozone is cautiously pursuing a digital euro to protect the euro; Japan and Singapore are enabling certain stablecoin licensing regimes to keep pace; the UK is exploring a digital pound mainly for wholesale markets. India’s rupee is not yet a major global currency, but digital innovation could enhance its international use. Successful deployment of a digital rupee (and potentially a regulated rupee stablecoin) could make the rupee more attractive for cross-border trade and remittances, especially within Asia. Indeed, as one analysis notes, India’s CBDC adoption is accelerating (along with China’s) – higher usage of e₹ can help uplift the rupee’s profile. However, India remains outside the “top five” reserve currencies. Without strong policy, the rupee risks falling further behind in a world where digital payment rails increasingly favour faster, blockchain-based alternatives dominated by major powers. Aligning with global trends (e.g. FSB standards) and leveraging India’s fintech strengths is seen as essential to ensure the rupee isn’t sidelined by the coming stablecoin/CBDC wave.
Contributed by Fellah Fajar, India Fintech Foundation
