In its latest Financial Stability Report released on June 28, the Reserve Bank of India (RBI) stated that stablecoins possess significant potential to negatively impact emerging markets and developing economies. The report identified six distinct threats posed by stablecoins, thereby further strengthening the RBI’s arguments against cryptocurrencies.
The Reserve Bank of India (RBI), known for its consistent criticism of cryptocurrencies, specifically highlighted the concerns it holds regarding stablecoins, particularly when viewed from the perspective of emerging markets and developing economies (EMDE). In its detailed assessment, the RBI presented six specific issues, despite facing challenges in obtaining reliable and authenticated data within the crypto ecosystem. This data gap poses obstacles in accurately evaluating the risks to financial stability.
One key problem emphasized by the RBI is the potential threat of currency substitution arising from stablecoins. Since stablecoins typically rely on underlying assets denominated in freely convertible foreign currencies, their widespread adoption could lead to a phenomenon known as “cryptoisation” of the economy. This, in turn, could result in currency imbalances on the balance sheets of banks, businesses, and households, thereby posing a risk to EMDEs.
According to the RBI, the presence of stablecoins within an emerging market or developing economy (EMDE) could pose challenges for the central bank in terms of setting domestic interest rates and managing liquidity conditions. Additionally, the decentralized, borderless, and pseudonymous nature of crypto-assets makes them potentially appealing tools for evading capital flow management measures.
The report highlights that stablecoins, by offering an alternative to the domestic financial system, have the potential to disrupt banks’ ability to mobilize funds and create credit, as they undermine the assessment of credit risks. Finally, the decentralized nature of peer-to-peer transactions makes them difficult to trace, thereby increasing the likelihood of their misuse or involvement in illicit activities.
The RBI reiterated its call for international cooperation, emphasizing the need for a globally coordinated approach to assess the risks faced by emerging markets and developing economies (EMDEs) in comparison to advanced economies (AEs). The RBI specifically mentioned that, as part of India’s G20 presidency, a key priority is to establish a regulatory framework at the global level for unbacked crypto-assets, stablecoins, and decentralized finance (DeFi).
Furthermore, the RBI has shown a more optimistic stance regarding central bank digital currency (CBDC). It initiated a pilot project for a wholesale digital rupee in November and a separate pilot project for a retail digital rupee in February. Additionally, in March, the RBI entered into an agreement with the Central Bank of the United Arab Emirates to explore the potential of a CBDC bridge that would facilitate trade and remittances.