Stablecoins represent the digital future of payments, and regulating them is the need of the hour to ensure financial stability and innovation in India.

About Stablecoins

• Stability Focus: Stablecoins utilize the underlying crypto technology but aim to reduce volatility. They were introduced in 2015.
• Pegging Mechanism: Stablecoins maintain a stable value by being pegged to a stable asset, typically the US Dollar (USD), often at a 1:1 convertibility (e.g., 1 token = 1 USD).
• Examples: Tether and USD Coin are examples of Stablecoins.

Stablecoin Utility and India’s Position

• High Demand in India: India has the largest number of Stablecoin holders globally, estimated at 314 million, despite the RBI not providing them with legal backing.
• Primary Use (Remittance): Stablecoins are popular for remittances because they solve the problem of high transaction costs associated with traditional banking. 
  • A person sending $1,000 can send nearly the full amount to a digital wallet in India with a cost often less than $1, compared to higher commissions charged by banks.
• Efficiency: Transfers are instant, cheaper, and available 24/7 without bank holidays.

Risks Associated with Stablecoins- TerraUSD Case Study

• TerraUSD Crash: The TerraUSD stablecoin, an algorithmic-backed cryptocurrency, collapsed due to its unstable design.
  • A massive sell-off caused its value to drop, the algorithm failed, resulting in a “death spiral,” and its value eventually hit zero, wiping out $60 billion in investment.
  • This case study shows that private currencies can fail, and issuing parties may abscond.
• US Regulation: The US government introduced the GENIUS Act  to regulate stablecoins.

About India’s Central Bank Digital Currency (CBDC)

• The RBI opposes private crypto due to risk and is introducing its own digital currency, the Central Bank Digital Currency (CBDC), also called the E-Rupi.
• CBDC is backed by the Government of India’s sovereign guarantee and cannot fail. It is intended to offer a safe, official digital currency option.

Differences between Stablecoins and Central Bank Digital Currencies (CBDCs)

• Issuer: Stablecoins are issued by private companies, whereas CBDCs like E-Rupi are issued by the RBI.
• Backing: Stablecoins are usually USD-pegged, while CBDCs carry the sovereign guarantee of RBI.
• Legal Tender: Stablecoins are not official legal tender, but CBDCs are recognized as legal tender.
• Architecture: Stablecoins run on decentralized systems, while CBDCs operate on a centralized framework.
• Primary Use: Stablecoins are mainly for global remittances, whereas CBDCs are designed for domestic payments.

Way Forward

• Legislation: India must create a law regulating stablecoins, clarifying their legal status.
• Consumer Protection: Rules are needed to address what happens to investor/customer money if a stablecoin issuing company fails.
• Licensing and Audits: RBI should license companies that issue stablecoins and regularly audit their accounts to ensure they maintain sufficient USD reserves.

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