{"id":106,"date":"2025-07-22T14:56:03","date_gmt":"2025-07-22T14:56:03","guid":{"rendered":"https:\/\/indiafintechfoundation.com\/blog\/?p=106"},"modified":"2025-07-22T14:57:03","modified_gmt":"2025-07-22T14:57:03","slug":"stablecoin-101","status":"publish","type":"post","link":"https:\/\/indiafintechfoundation.com\/blog\/stablecoin-101\/","title":{"rendered":"STABLECOIN 101"},"content":{"rendered":"\n

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 \u201cwritten by and for the crypto industry<\/em><\/strong>\u201d 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.<\/p>\n\n\n\n

In this blog, we dive deep into understanding stablecoin and its implications for the Indian Fintech ecosystem.<\/p>\n\n\n\n

Let\u2019s take it to the basics: What exactly is a stablecoin?<\/mark><\/strong><\/p>\n\n\n\n

Stablecoins are cryptocurrencies<\/strong> 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 \u201clock in\u201d their value.  This makes them act as a medium of exchange (unlike volatile coins like Bitcoin), while leveraging blockchain\u2019s speed and transparency. For example<\/em>, the World Economic Forum notes that stablecoins \u201cmaintain a steadier value\u201d than other cryptos by being linked to underlying assets. In 2024, stablecoins facilitated about \\$27.6 trillion<\/strong> in transactions \u2013 more than Visa and Mastercard combined<\/em> \u2013 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.<\/p>\n\n\n\n

Evolution of Cryptocurrency: Bitcoin and Stablecoins<\/mark><\/strong><\/p>\n\n\n

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The crypto landscape began with Bitcoin (launched 2009) and a host of volatile \u201caltcoins.\u201d  Stablecoins emerged around 2014 <\/strong>to solve Bitcoin\u2019s volatility<\/strong>, 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,<\/em> 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<\/strong>, the stablecoin market has grown to over \\$200 billion<\/strong> by late 2024. This boom has drawn sharp regulatory attention: central banks warn that unregulated stablecoins<\/strong> could pose systemic risks<\/strong> to financial stability and monetary sovereignty.<\/p>\n\n\n\n

Stablecoins vs. Central Bank Digital Currencies (CBDCs)<\/mark><\/strong><\/p>\n\n\n

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Stablecoins differ fundamentally from CBDCs<\/strong> (government-issued digital currencies).  A CBDC is a digital form of a country\u2019s fiat currency issued by its central bank and carries the same legal tender status (like physical cash). For example, India\u2019s Digital Rupee (e\u20b9)<\/strong> 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<\/strong> 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 <\/strong>law makes them legal tender. As PwC notes, \u201cCBDCs 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<\/em>\u201d. 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\u2019s RBI digital rupee is explicitly a liability of the RBI (issued like banknotes), whereas a private rupee-pegged stablecoin would be a blockchain token<\/strong> 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).<\/p>\n\n\n\n

Digital Rupee vs. Stablecoins<\/mark><\/strong><\/p>\n\n\n

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India\u2019s Digital Rupee (e\u20b9)<\/strong>, launched as a pilot in late 2022, is a retail CBDC: it\u2019s literally the Rupee in digital form, issued and guaranteed by the RBI. It functions like cash in a digital wallet, preserving RBI\u2019s finality of settlement. Since the e\u20b9 is pegged 1:1<\/strong> to the rupee and fully backed by RBI reserves, it is a stable asset by design<\/em>. In contrast, any rupee stablecoin<\/strong> 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\u2019s 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<\/em> 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\u20b9 is using sovereign currency.<\/p>\n\n\n\n

India\u2019s Position in the Stablecoin\/CBDC Landscape<\/mark><\/strong><\/p>\n\n\n\n

India has been cautious with cryptocurrencies and stablecoins. The RBI has repeatedly warned<\/strong> that crypto assets (including stablecoins) pose risks to monetary policy and stability. India currently has no<\/em> 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 <\/strong>(30% plus 1% TDS) and fall into legal grey areas. By contrast, India is leading<\/strong> in CBDC development: PwC\u2019s 2023 CBDC Index ranks India first due to its digital rupee pilots and an expected full launch. The RBI launched the retail e\u20b9 pilot in Dec 2022 and has since added features (like offline transfer). According to authorities, India\u2019s rapid fintech growth (UPI, Aadhaar) gives it strong infrastructure<\/strong> to leverage a digital rupee and even regulated rupee-pegged stablecoins. Some analysts argue India is a \u201csleeping giant\u201d in virtual assets whose talent and diaspora could drive innovation if given clarity.<\/p>\n\n\n\n

Potential Benefits of Stablecoins for India<\/mark><\/strong><\/p>\n\n\n\n

A regulated stablecoin framework could unlock several advantages for India. Remittances<\/strong> are a prime use case: India receives ~$100\u202fbillion annually from its 36\u202fmillion 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\u2019s 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\u2019s 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<\/strong> could be held by a rupee stablecoin issuer, attracting domestic and global investors. Moreover, integrating a regulated rupee stablecoin with India\u2019s digital public infrastructure (UPI\/Aadhaar) could enhance financial inclusion and export competitiveness. Analysts suggest that pairing the e\u20b9 with regulated rupee-pegged stablecoins could create a hybrid ecosystem (ensuring on-chain compliance while leveraging blockchain for efficiency).<\/strong><\/p>\n\n\n\n

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  • Cross-border payments:<\/strong> By eliminating correspondent banks, stablecoins reduce remittance costs and settlement times. In India\u2019s context, leveraging its vast UPI\/Aadhaar system (900\u202fmillion users) could support fast, KYC-compliant stablecoin transfers.<\/li>\n\n\n\n
  • Financial inclusion:<\/strong> India\u2019s e\u20b9 and stablecoins could give cash-like digital money to people without bank accounts. This broadens access to savings and loans.<\/li>\n\n\n\n
  • Monetization of savings:<\/strong> Safer than other crypto, a RBI-regulated stablecoin could let Indians earn returns on sovereign liabilities, potentially helping to preserve savings against inflation.
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    Government Concerns and Challenges<\/mark><\/strong><\/p>\n\n\n

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    Policymakers remain wary of stablecoins. The RBI warns that broad crypto adoption (including stablecoins) could undermine monetary policy<\/strong> and financial stability. As Business Standard reports, RBI\u2019s Financial Stability Report cautions that crypto growth might reduce policy effectiveness and worsen fiscal risks. BIS echoes this globally, noting unregulated stablecoins \u201cpose a risk to financial stability and monetary sovereignty\u201d. Key concerns include:<\/p>\n\n\n\n

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    • Monetary sovereignty and currency substitution:<\/strong> 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 \u201cdigital dollarisation\u201d and see stablecoins as a challenge to their control.<\/li>\n\n\n\n
    • Regulatory arbitrage:<\/strong> Without clear rules, investors may flock to off-shore stablecoins, potentially evading India\u2019s capital controls. Under FEMA, stablecoin remittances are in a gray area \u2013 RBI could deem them unauthorized foreign exchange.<\/li>\n\n\n\n
    • Consumer protection and AML:<\/strong> Peer-to-peer crypto transfers can skirt traditional KYC\/AML checks. The Indian Supreme Court already warned the sector could become a \u201crefined form of hawala\u201d without regulation.<\/li>\n\n\n\n
    • Financial stability risks:<\/strong> Sudden redemptions (a \u201crun\u201d on a stablecoin) could force rapid asset sell-offs, echoing Terra\u2019s collapse in 2022. The IMF\/FSB also noted stablecoins have \u201cpotential run risks\u201d if their backing is opaque.<\/li>\n\n\n\n
    • Technical challenges:<\/strong> Ensuring blockchain networks scale securely is non-trivial. RBI and banks must bolster cyber\u2010security around any crypto infrastructure.<\/li>\n<\/ul>\n\n\n
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      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).<\/p>\n\n\n\n

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      Regulation and Policy Options<\/strong><\/mark><\/p>\n\n\n\n

      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\u2019s MiCA law already covers fiat-backed stablecoins with strict reserve requirements. In India, experts suggest aligning with IMF\/FSB guidance<\/strong>. The FSB has released recommendations that large \u201cglobal stablecoins\u201d must have robust legal claims, transparency, and oversight.<\/p>\n\n\n\n

      Possible regulatory approaches for India include:<\/p>\n\n\n

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