This made users and markets sceptical of crypto reliability. To counter this downside, the concept of a ‘stablecoin’ was devised. As the name indicates, it is a form of crypto asset that offers greater stability because its value is pegged to another asset, such as gold or a fiat currency.
As stablecoins offer a hedge against the mercurial changes in value that crypto assets are notorious for, their launch marks a marriage of crypto assets with fiat currencies aimed at retaining the best aspects of both. Transactions conducted through stablecoins are instantaneous and highly accessible.
Any user with an internet connection and a digital wallet can access and trade in them. This mechanism has great potential to advance financial inclusion. Stablecoins that are pegged to the US dollar are abundantly available in the market and include Tether and USD Coin.
However, rupee-backed stablecoins are just beginning to make inroads in the market.
While most of these benefits are constant across stablecoins pegged to fiat currencies, a rupee-backed stablecoin presents special opportunities for India.
Using a stablecoin pegged to the rupee would help Indian users guard against exposure to currency fluctuations typical of foreign-currency-pegged stablecoins. Further, a rupee-backed stablecoin would be regulated by Indian laws and hence would enable users to avoid international regulatory complexities.
It would also protect Indian users against sudden disruptions that could affect the useability of other fiat currency-backed stablecoins. Additionally, it would offer Indian users the ease of transacting in a currency that is aligned with their other financial activities.
Rupee-backed stablecoins would complement the Reserve Bank of India’s Central Bank Digital Currency (CBDC), namely the e-rupee that is being tested out. As of now, the e-rupee is subject to certain transaction- and access-based restrictions, which could limit its adoption as a digital alternative to the regular rupee.
However, the combination of rupee-backed stablecoins and the e-rupee could aid in the creation of an egalitarian and free digital finance ecosystem in India.
The rise of a rupee-backed stablecoin could foster a localized approach to digital financial instruments, catering to the unique needs of the Indian economy and its vast user base. It could assist in strengthening the soft power of the rupee globally and driving financial inclusion in the country.
Rupee-pegged stablecoins can considerably help cut transaction costs and deliver greater efficiency in the financial ecosystem.
For instance, through blockchain-based peer-to-peer transfers, stablecoins can bypass the multiple intermediaries and high fees involved in traditional remittance channels .
As per a Bank for International Settlements (BIS) study, the use of digital currencies in payments can cut transaction costs by as much as 40-50%, making rupee-backed stablecoins a valuable tool for businesses and individuals alike.
These factors have together resulted in a sharp increase in the daily trading volumes of rupee-backed stablecoins. This underlines a significant shift in user preferences toward rupee-pegged alternatives to American stablecoins.
However, at present, the market for stablecoins is vulnerable to risks related not just to India’s stance on them, but also operational resilience and cross-border regulatory arbitrage. The BIS and Financial Stability Board (FSB) have both highlighted the transformative potential of stablecoins, while cautioning against their risks.
The BIS’s 2023 report on The Future of Payments emphasizes their ability to enhance payment efficiency and financial inclusion, particularly in emerging markets. Similarly, the FSB’s recent guidelines on global stablecoins underline the need for strong regulatory frameworks to prevent financial instability.
Therefore, it is imperative for India to create an effective regulatory framework for governing stablecoins, ensuring alignment with the BIS and FSB’s global recommendations.
Primarily, a robust and scalable technological framework is needed to support the issuance, trading and storage of rupee-backed stablecoins.
Addressing cybersecurity risks and ensuring interoperability with existing systems will be crucial. Also, it will be important for India to run educational programmes, so that users are well-informed about the risks involved in stablecoin transactions.
While India’s central bank may want its e-rupee to serve all the functions of a digital currency, the country could also consider encouraging the use of rupee-linked stablecoins for domestic and international transactions. With multiple options, usage would grow, which would strengthen the rupee.
The government should take note of the popularity of rupee-backed stablecoins and create an effective governance mechanism for them. This will enhance transparency, accountability and security in the market.
As a developing economy, India could make significant gains by riding a tech-enabled currency revolution that’s underway.
The author is a research fellow in corporate law and financial regulation at Vidhi Centre for Legal Policy.
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