Cryptocurrencies and related assets, such as stablecoins, pose a threat to the financial system. Central banks worldwide think so and fear losing control over the global financial system if governments allow easy access to them. Over the past couple of months, the Reserve Bank of India has emphasised that even stablecoins, considered a bridge between crypto and the reliability of traditional currency, are a risk. In separate addresses at conferences, RBI governor Sanjay Malhotra and deputy governor T Rabi Sankar spoke in detail on these issues. The government must decide whether to regulate the use of cryptocurrencies and related assets. It is a policy decision that could eventually determine our ability to access crypto assets freely. RBI is vehemently opposing it.
A fundamental problem about stablecoins is that they have yet to establish themselves as a ‘stable’ alternative to owning cryptocurrencies, the Indian central bank argues. Stablecoins are cryptocurrencies whose value is maintained by a private issuer through a reserve. However, RBI is questioning the credibility of private issuers to maintain stability. The promise of stablecoins to enable efficient cross-border payments, enhance financial inclusion, and serve as a bridge between the crypto ecosystem and the real economy continues to come under scrutiny.
The most significant risk of alternative currencies is that they will make the US dollar a de facto currency in the country. That means stablecoins holding US dollar reserves could become the currency. It is not a good thing for the Indian Rupee. Goods and services would be priced in different currencies, which would hurt the price stability in the economy. To understand that, you need to know that the RBI’s role is primarily to maintain price stability. That means it has to control the supply of money and inflation in the economy. Any disruption caused by the excessive use of stablecoins or other crypto-assets would reduce the demand for the rupee. It would devalue the currency and increase supply, stoking inflation. The primary concern is that it is impossible to control the supply of crypto and related assets. Any price distortion means the values of all assets, as we know them, could change forever.
India has already enabled a unified payment interface (UPI) for digital payments and introduced a central bank-issued digital currency (CBDC). That currently makes the domestic financial system efficient. Stablecoins are supposed to do the same for international transactions. However, India is actively working with nations to take the UPI technology global. In such a situation, it is hard to imagine the government taking any initiative to introduce or regulate stablecoins.
What it means
From a personal finance standpoint, you need to be very careful about owning unregulated assets. A primary reason for that is that you have no recourse to any remedial action if something goes wrong. There is no regulatory oversight over stablecoins, and it is not possible to do so across countries. A seamless operation of such asset classes requires a global regulator. National boundaries limit a regulator's ability to enforce its rules. You should understand the implications of investing or using stablecoins. From access to taxation, there could be hurdles at every juncture.
Governments are unlikely to make it easy for you to convert your money into such assets and vice versa. Whenever new technology or disruption emerges, many people who support human evolution and advancement encourage immediate adoption. However, most experts have advised caution while using crypto assets and stablecoins. A primary reason for that is the threat to price stability. Any run on a currency in one country can spark economic contagion that is hard to contain.