Ever since US President Donald Trump signed legislation to regulate dollar-pegged cryptocurrencies known as stablecoins, global interest in digital assets has surged. For India, the rise of stablecoins is not merely a technological trend but a monetary policy challenge. As these private digital currencies gain traction, they threaten to weaken the Reserve Bank of India’s control over liquidity, interest rates, and currency stability — issues that many emerging economies are now confronting. With global stablecoin market capitalisation exceeding $300 billion, India’s Chief Economic Adviser V Anantha Nageswaran has rightly warned that “the alarm bells are ringing.”
Stablecoins are cryptographic tokens pegged to fiat currencies like the dollar. They promise faster payments, 24×7 settlements, and lower cross-border costs — benefits especially valued in regions with limited banking access. The International Monetary Fund (IMF) notes that in high-inflation economies, stablecoins often act as financial lifelines.
READ | India’s COP30 agenda puts adaptation at the centre of climate action
Yet, the convenience carries risk. The widespread use of privately issued stablecoins can weaken the transmission of monetary policy. When individuals shift from local currency deposits to dollar-backed digital assets, central banks lose some of their power to influence money supply and credit conditions. The Bank for International Settlements (BIS) has warned that global stablecoins could disrupt monetary policy, erode seigniorage, and threaten financial stability.
Threat to monetary sovereignty
A central bank’s authority rests on its ability to manage liquidity, steer interest rates, and stabilise prices. If individuals and firms adopt dollar stablecoins at scale, the monetary transmission mechanism starts to erode. Deposits flow away from banks into digital wallets, breaking the chain between commercial banks and the central bank.
This weakens banks’ lending capacity, reduces the RBI’s control over inflation, and erodes fiscal strength by cutting into seigniorage — the profit from currency issuance. The IMF has cautioned that such a shift may accelerate dollarisation, where local economies rely on the dollar and import its monetary policy, leaving less room for independent decision-making. For India, this means that its monetary sovereignty could slowly slip into the hands of private issuers abroad.
The geopolitical undercurrent
Beyond economics, stablecoins have a geopolitical undertone. Their growing global circulation strengthens the dominance of the dollar, expanding American financial influence through private networks rather than public institutions. As stablecoin adoption deepens, Washington’s ability to project financial power extends beyond borders, giving it informal leverage over international payment systems.
For India and other emerging economies, this is more than a monetary risk—it is a strategic dependency. The proliferation of dollar-linked tokens could entrench US financial dominance and make the global system more vulnerable to US regulatory or sanctions policies. To safeguard its autonomy, India should work with partners like Singapore and the UAE to create regional payment corridors using rupee- or CBDC-based frameworks that promote financial multipolarity and reduce dollar dependence.
Why the issue is urgent now
The passage of the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act has created legal clarity for dollar-backed tokens in the US, paving the way for rapid expansion. At the same time, blockchain-based payment systems and tokenised money are evolving at unprecedented speed. Stablecoins now sit at the heart of the next phase of digital finance.
India’s advantage lies in its strong domestic payments infrastructure, led by the Unified Payments Interface (UPI). Yet, even UPI cannot fully shield India from external financial flows driven by global stablecoins. Without regulatory guardrails, India could face unwanted capital movements and volatility in cross-border transactions. The need for a coherent digital currency strategy has therefore never been greater.
The digital rupee as a strategic counterweight
The most credible response to the stablecoin threat lies in the digital rupee, India’s Central Bank Digital Currency (CBDC). If designed with efficiency, privacy, and interoperability in mind, it can replicate the utility of stablecoins without undermining the financial system.
The RBI’s pilot projects should focus on user experience, integration with UPI, and cross-border functionality. A digital rupee that settles instantly, works offline, and maintains transaction privacy can compete directly with private tokens. More importantly, it can help India retain monetary sovereignty while advancing digital innovation. The goal should be to make the CBDC a public good — technologically robust and globally interoperable — rather than a bureaucratic replica of the existing rupee.
Financial stability and consumer protection
Stablecoins also pose micro-level risks that go beyond macroeconomic control. Without strict reserve requirements and transparent audits, their issuers may lack sufficient backing to meet redemption demands. Global experience — from TerraUSD’s collapse to market volatility in Tether — shows how quickly trust can evaporate.
India must therefore address consumer protection and systemic risk before stablecoins become mainstream. The RBI, SEBI, and the finance ministry need a coordinated framework for disclosure norms, reserve verification, and redemption mechanisms. Without these, a sudden loss of confidence in stablecoins could transmit shocks across the financial system. As the G20 and Financial Stability Board (FSB) have highlighted, regulatory clarity is essential before large-scale cross-border stablecoin operations are allowed.
Policy path forward
India’s challenge is twofold: prevent the substitution of domestic monetary assets by dollar-pegged tokens, and at the same time, leverage blockchain efficiency under a sovereign framework. The path forward lies in regulating issuers and intermediaries, maintaining control over monetary aggregates, and positioning the digital rupee as a safe, efficient public alternative.
International collaboration will be crucial. The BIS and G7 have stressed that stablecoins must not operate globally without adequate oversight. India can take a leadership role in developing multilateral standards to ensure one country’s lax regulation does not become another’s monetary vulnerability.
Stablecoins are no longer a speculative experiment — they are now embedded in the global payments architecture. For India, the task is not to resist innovation but to manage it. The country must capture the benefits of tokenised finance while preserving the RBI’s control over money creation, credit flow, and financial stability.
If India balances innovation with prudence, it can build a resilient digital ecosystem that complements, not compromises, monetary sovereignty. The future of money will be digital — but whether it remains sovereign will depend on the choices policymakers make today.