Stablecoins and Their Regulatory Landscape

The US president recently endorsed legislation establishing a regulatory framework for stablecoins, stirring global discussions, including in India. Stablecoins like Tether and USD Coin maintain stability by being pegged to fiat currencies, such as the US dollar, in a 1:1 ratio, distinguishing them from volatile cryptocurrencies.

Characteristics and Benefits of Stablecoins

• Transaction Efficiency: They promise instant transactions, zero chargeback risks, and low-cost money movement, making them attractive for financial operations.
• Use Cases in India: Suggested for remittances, trade settlements, and secure financial access. However, India currently does not recognize them legally.
• Blockchain Advancements: Blockchain technology enhances transaction safety and ease of monitoring due to its decentralized and immutable nature.

India's Position on Stablecoins

• While the Reserve Bank of India (RBI) expresses caution over cryptocurrencies, citing risks to monetary policy, stablecoins remain a debated topic. 
• Indian regulations classify all cryptocurrencies as virtual digital assets under Section 2 (47A) of the Income Tax Act, 1961. 
• A clearer categorization could lead to regulatory acceptance.

Central Bank Digital Currency (CBDC) vs Stablecoins

• The RBI's retail CBDC is positioned as a stablecoin alternative, seeing significant adoption with 6 million users by March 2025 and a circulation value increase to ₹1,016 crore.
• CBDC features allow for programmable transactions, useful for targeted subsidies and cross-border remittances, enhancing financial precision and preventing misuse.

Regulatory and Adoption Perspectives

• A robust policy framework is necessary for reporting and data sharing with legal authorities to ensure compliance and security.
• Narrowing the definition of cryptocurrencies to include use-case-specific frameworks, like stablecoins for cross-border transfers, could facilitate regulatory acceptance and adoption.