The Reserve Bank of India (RBI) has highlighted the potential threats posed by stablecoins to emerging markets and developing economies in its recent Financial Stability Report. The report identifies six specific risks associated with stablecoin adoption and emphasizes the need for global regulation in this area.
Stablecoins, due to their underlying assets being generally denominated in freely convertible foreign currencies, can lead to currency substitution, thereby undermining the stability of local currencies in emerging markets. Large-scale adoption of stablecoins could also result in a ‘cryptoisation’ of the economy, causing currency mismatches on the balance sheets of banks, firms, and households.
Additionally, the presence of stablecoins poses challenges for EMDE central banks in setting domestic interest rates and maintaining liquidity conditions. The decentralized and pseudonymous nature of crypto-assets makes them attractive instruments for circumventing capital flow management measures, potentially disrupting the financial systems of these economies.
The report further highlights that stablecoins could interfere with banks’ ability to mobilize funds and create credit by compromising credit risk assessment. Moreover, the difficulty in tracking peer-to-peer transactions increases the potential for illicit activities and money laundering.
In light of these risks, the RBI reiterates its call for global coordination and regulation. The bank emphasizes the need for a globally coordinated approach to analyze the risks faced by emerging markets and developing economies compared to advanced economies. Under India’s G20 presidency, establishing a framework for regulating unbacked crypto-assets, stablecoins, and decentralized finance (DeFi) is one of the priorities.
While expressing concerns about stablecoins, the RBI has shown interest in central bank digital currencies (CBDCs). It has initiated pilot projects for both wholesale and retail digital rupees and has collaborated with the Central Bank of the United Arab Emirates to explore a CBDC bridge for facilitating trade and remittances.
As the RBI continues to advocate for global regulation, it acknowledges the importance of addressing the risks associated with stablecoins to ensure financial stability in emerging markets and developing economies.