Potential of rupee-backed stablecoins in India 

Source: The post potential of rupee-backed stablecoins in India has been created, based on the article “Let rupee-backed stablecoins complement RBI’s CBDC” published in “Indian Express” on 27th December 2024 

UPSC Syllabus Topic: GS Paper3- Economy 

Context: The article discusses the potential of rupee-backed stablecoins in India. These stablecoins combine cryptocurrency benefits with rupee stability. They can enhance financial inclusion, reduce costs, and support the rupee’s global influence, but require strong regulations and technological infrastructure. 

What Are Stablecoins and Why Were They Introduced? 

1. Stablecoins are crypto assets created to reduce the extreme volatility of traditional cryptocurrencies like Bitcoin.
2. They are pegged to stable assets, such as fiat currencies (e.g., US dollar, Indian rupee) or gold, to provide price stability.
3. For example, popular stablecoins like Tether and USD Coin are pegged to the US dollar.
4. Stablecoins retain the advantages of cryptocurrencies, including fast, secure, and low-cost transactions, while minimizing risks associated with value fluctuations.
5. Their introduction was driven by events like Bitcoin’s 30% value drop in May 2021, which made users skeptical of cryptocurrency reliability.
6. Blockchain-based stablecoins can cut transaction costs by 40-50% (BIS report), enhancing their utility in global and local markets.
7. Rupee-backed stablecoins are emerging as a localized solution for India, aligning with domestic financial systems and regulations.
8. The BIS and Financial Stability Board (FSB) have both highlighted the transformative potential of stablecoins, while cautioning against their risks.

What Makes Rupee-Backed Stablecoins Unique for India? 

1. Currency Stability: Rupee-backed stablecoins protect Indian users from currency fluctuations associated with dollar-pegged stablecoins.
2. Regulatory Alignment: They operate under Indian laws, avoiding international regulatory complexities.
3. User Convenience: Transactions in rupees align with users’ financial activities, ensuring ease of use.
4. Economic Strength: They strengthen the rupee’s global position and foster localized digital financial systems. This can boost financial inclusion, efficiency, and the rupee’s soft power internationally.

How Can Stablecoins and CBDC Work Together? 

1. India’s Central Bank Digital Currency (CBDC), the e-rupee, has limitations like transaction restrictions. 
2. Rupee-backed stablecoins can complement the e-rupee by promoting a broader digital finance ecosystem. This approach may enhance adoption and financial inclusion in India.

For detailed information on Digital Rupee: Advantages and Challenges read this article here 

What Steps Should India Take? 

1. Develop Robust Technological Infrastructure: Create systems for issuing, trading, and storing rupee-backed stablecoins. Ensure cybersecurity and interoperability.
2. Educate Users: Run awareness programs about risks in stablecoin transactions.
3. Regulate Effectively: Align policies with BIS and FSB guidelines to prevent instability.

Question for practice: 

Examine how rupee-backed stablecoins can enhance financial inclusion and strengthen the rupee’s global position while addressing associated risks.