India's top economic adviser warns of monetary policy challenges from USD stablecoins

Dollar-backed stablecoins will emerge as a major issue in the coming year and may create difficulties for countries managing their monetary systems, a top Indian economic official warned on Wednesday.

Speaking at a gathering in Mumbai, V. Anantha Nageswaran, who serves as India’s Chief Economic Adviser, pointed to potential problems these digital currencies could create. “The presence of a dollar stablecoin will bring with it its own challenges for monetary policy, monetary transmission and for seigniorage benefits of any country,” Nageswaran told the audience.

Seigniorage means the profit governments make from issuing currency, calculated as the difference between what money is worth and what it costs to make and distribute.

According to Nageswaran, India faces less pressure to adopt stablecoins compared to countries in regions like the European Union because the nation already has a fast domestic payment network called the Unified Payments Interface, or UPI.

He also noted that stablecoins would add another layer of competition for banks, both in serving as middlemen for financial transactions and in pulling in customer deposits.

Global stablecoin market surpasses $300 billion

The global market value of stablecoins tied to the U.S. dollar has grown beyond $300 billion, driven by supportive rules in America and increasing acceptance worldwide.

Meanwhile, India appears intent on avoiding passing specific laws to control cryptocurrencies within its borders. Government officials worry that bringing digital currencies into the regular financial system might create dangerous risks that could spread throughout the economy, based on information in an official document.

The document, which Reuters reviewed, includes the Reserve Bank of India’s assessment that managing cryptocurrency risks through regulation would prove difficult in real-world application.

Cryptocurrency has gained wider acceptance around the world since U.S. President Donald Trump entered office, with Bitcoin prices reaching new record peaks. Bitcoin remains the largest cryptocurrency measured by total market value. The U.S. has also approved laws allowing broader use of stablecoins, which are digital currencies backed by traditional money, making them less prone to dramatic price swings.

China maintains its prohibition on cryptocurrencies but is looking at creating a stablecoin backed by the yuan. Japan and Australia are building regulatory systems for these digital assets but remain careful and are not actively encouraging the industry.

The government document, prepared this month, explains that regulating cryptocurrencies in India would give them “legitimacy” and “may cause the sector to become systemic.”

On the other hand, while banning them completely could address the “alarming” risks from mostly speculative crypto trading, such a ban would not stop person-to-person transfers or trading on decentralized platforms.

India’s shifting crypto stance

As reported by Cryptopolitan back in 2021, India drafted legislation to ban private cryptocurrencies but never moved forward with it. When India held the G20 presidency in 2023, officials pushed for worldwide rules to govern these assets. In 2024, plans to release a discussion paper on cryptocurrency policy were delayed, with officials saying they would wait to see how the U.S. formalized cryptocurrency use.

Currently, international crypto trading platforms can work in India after registering with a government agency responsible for checking money laundering risks. The government also charges heavy taxes on cryptocurrency profits. However, the central bank has consistently warned about the dangers of dealing with them, which has practically frozen trading between India’s official banking system and cryptocurrencies.

Indian residents hold cryptocurrency investments worth $4.5 billion, according to the document, which also states that cryptocurrency use currently poses neither significant impact nor systemic danger to financial stability.

The document suggests that limited regulatory clarity has actually helped control cryptocurrency risks on the regulated financial system. Current tax policies and other laws discourage speculative cryptocurrency trading and punish fraud and criminal activity.

Given that different countries take different approaches to cryptocurrency regulation, “charting a clear way forward or identifying a uniform policy approach is not straightforward,” the document states.

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