Assessing the Place of Stablecoins in India’s Financial System

The rapid evolution of digital currencies has sparked ongoing debate about the legitimacy and potential role of stablecoins within the modern financial landscape, particularly in diverse economies like India.

Stablecoins, a form of cryptocurrency typically pegged to fiat currencies or backed by reserves, are often promoted as tools to enhance cross-border payments, financial inclusion, and digital innovation. However, foundational questions remain about their true attributes. Unlike sovereign-issued money, which gains public trust through state backing, stablecoins are essentially private instruments. This raises critical concerns over trust, stability, and the so-called “singleness” of money, whereby all forms of currency are seamlessly interchangeable within an economy. Without sovereign backing and a clear, enforceable promise to pay, stablecoins fall short of these essential characteristics, potentially resulting in a fragmented and unstable monetary system.

Proponents argue that stablecoins can make international transfers faster and more efficient, but India’s existing digital payments infrastructure, which includes systems like UPI and NEFT, already delivers reliable and low-cost domestic transactions. The purported benefits of stablecoins in cross-border contexts are uncertain, especially given doubts regarding the global acceptability and regulatory safeguards of private issuers. Similarly, arguments that stablecoins drive financial inclusion or act as a meaningful bridge between the crypto world and real economy have not been substantiated in practice; their use remains primarily confined to the crypto trading ecosystem.

On the risk front, widespread adoption of stablecoins could undermine monetary sovereignty in emerging economies such as India. Their presence threatens to erode the effectiveness of monetary policy, challenge capital flow management, disrupt bank intermediation, and transfer seigniorage income from public to private hands. Because stablecoins are borderless, their circulation can also compromise financial stability in countries with capital controls, raising the risk of unintended foreign influence and systemic vulnerabilities.

Global regulatory bodies have acknowledged these challenges, with groups such as the Financial Stability Board and the Bank for International Settlements highlighting that stablecoins routinely fail fundamental tests required to anchor a monetary system. Their potential for regulatory arbitrage and macro-financial disruption is particularly acute in emerging and developing markets.

For India, the prudent approach is to uphold trust in the existing monetary framework, reinforce macro-financial stability, and channel innovation through state-backed digital instruments such as Central Bank Digital Currencies (CBDCs). CBDCs offer the technological advantages touted by stablecoins—programmability, secure digital transfer, and cross-border potential—while preserving the core principles of fiat currency and systemic trust. By encouraging CBDC adoption and interlinking payments systems, India can achieve the same efficiency and inclusivity aims without exposing the financial system to the risks of private digital money.

The significance of this issue is clear: India’s policy decisions today will shape the stability and integrity of its financial sector for years to come. Stablecoins, while innovative, pose risks and offer no benefits that cannot be better delivered by robust public money and evolving digital infrastructure.