Stablecoins are a threat to India's monetary sovereignty, warns RBI
What's the story
The Reserve Bank of India (RBI) has warned that the widespread adoption of stablecoins might pose a major threat to India's monetary sovereignty as well as financial stability. In its bi-annual financial stability report, the central bank highlighted the potential risks associated with these digital currencies. "Trust in money is the foundation for maintaining financial stability," it said while explaining its concerns over stablecoins.
Policy concerns
Stablecoins and their impact on monetary policy
The RBI pointed out that the adoption of foreign currency-denominated stablecoins could weaken domestic monetary control and transmission channels. It stressed that while these digital currencies are gaining traction in the crypto asset space, they don't meet the core principles of a robust monetary system, singleness, elasticity, and integrity. This is because stablecoins can create important financial stability risks due to their inherent vulnerabilities.
Debate
RBI's stance on CBDCs v/s stablecoins
The RBI has been cautious about crypto assets, including stablecoins. It has stressed the importance of sovereign digital infrastructure to protect monetary sovereignty and ensure financial stability. The central bank also emphasized that central bank money is what maintains the integrity of the financial system and should remain "the anchor for trust in money." Central Bank Digital Currencies (CBDCs) could offer the benefits that stablecoins promise but with added credibility and safety from central banks.
Digital currency preference
RBI's advocacy for CBDCs
The RBI has strongly advocated for countries to prioritize CBDCs over privately issued stablecoins. This is to maintain trust in money, ensure financial stability, and create a next-generation payments infrastructure that is faster, cheaper, and secure. The central bank also noted that the risks posed by stablecoins to macrofinancial stability outweigh their purported benefits at this stage.
Risk factors
Stablecoins' potential for financial stability risks
The RBI warned that wider adoption of stablecoins could create new channels for financial stability risks, especially in times of market stress. To mitigate these risks, jurisdictions must carefully assess the potential threats and formulate policy responses suited to their financial systems. The central bank also cautioned that stablecoins could bypass capital movement controls and complicate macroeconomic management, especially critical for emerging economies like India.
Regulatory concerns
Stablecoins and illicit activities
The RBI flagged the risk of stablecoins being used for illicit activities such as money laundering, terrorism financing, and proliferation financing without adequate regulation. It noted that one of the factors driving stablecoin growth could be legal/regulatory clarity in major jurisdictions between 2023-2025, such as the US, European Union, Singapore, Hong Kong, and Japan.