The last decade has seen an extraordinary surge in the popularity of crypto assets worldwide. Despite their appeal due to decentralized frameworks, rapid transactions, and ease of access, cryptocurrencies have faced criticism for their volatility. Bitcoin’s dramatic 30% value drop in May 2021 exemplified this unpredictability, eroding trust among users and investors. Stablecoins, designed to address these challenges, offer a promising alternative.
A stablecoin is a digital currency pegged to a stable asset such as gold or fiat currencies, providing users with a more reliable option for transactions. Stablecoins like Tether and USD Coin, pegged to the US dollar, are already widely available. Now, rupee-backed stablecoins are gaining traction, offering unique advantages for India’s economic landscape.
Advantages of Rupee-Backed Stablecoins
Stablecoins pegged to the rupee provide Indian users with significant benefits, including insulation from foreign exchange risks. Unlike stablecoins linked to foreign currencies, rupee-backed stablecoins would adhere to Indian regulations, reducing international complexities and ensuring smoother transactions.
Such stablecoins also present an opportunity for financial inclusion. Transactions via rupee-backed stablecoins require only an internet connection and a digital wallet, enabling broader access across India’s vast and diverse population. Additionally, these stablecoins offer an alternative for domestic users seeking to avoid potential disruptions tied to foreign fiat-backed digital currencies.
The synergy between rupee-backed stablecoins and the Reserve Bank of India’s Central Bank Digital Currency (CBDC), the e-rupee, could revolutionize India’s digital payment ecosystem. While the e-rupee is currently subject to access and transaction restrictions, stablecoins could bridge these gaps, fostering a more inclusive and egalitarian digital economy.
Boosting India’s Economic Potential
The potential of rupee-backed stablecoins extends beyond financial inclusion. Blockchain-based peer-to-peer transfers could significantly reduce transaction costs by eliminating intermediaries, making them a cost-efficient solution for businesses and individuals. According to the Bank for International Settlements (BIS), the use of digital currencies in payments could cut transaction costs by up to 50%.
Daily trading volumes of rupee-backed stablecoins have surged, reflecting a shift in user preference toward localized digital currencies. This growing adoption signals an opportunity for India to enhance the global prominence of the rupee while fostering a robust digital financial infrastructure.
Challenges and Regulatory Needs
Despite the benefits, stablecoins pose risks, including operational vulnerabilities and cross-border regulatory gaps. Both the BIS and the Financial Stability Board (FSB) emphasize the need for stringent regulations to mitigate these risks.
To ensure a secure and scalable market, India must develop a robust framework for the issuance, trading, and storage of rupee-backed stablecoins. This would include addressing cybersecurity concerns, ensuring interoperability with existing systems, and educating users about potential risks.
By complementing the e-rupee with rupee-backed stablecoins, India could strengthen its digital economy while maintaining financial stability. A clear governance structure would enhance transparency and security, enabling India to capitalize on the ongoing tech-driven currency revolution.
