Reserve Bank of India (RBI) Highlights Risks of Stablecoins in Developing Economies, Advocates Global Regulation

The Reserve Bank of India (RBI) has expressed concerns about the potential negative impact of stablecoins on emerging markets and developing economies, according to its latest Financial Stability Report released on June 28. While the RBI has been critical of cryptocurrencies in general, it specifically highlighted the risks associated with stablecoins from the perspective of these economies. In the report, the RBI outlined six key threats posed by stablecoins, despite acknowledging the difficulty in obtaining authenticated data and addressing data gaps within the crypto ecosystem.

One significant concern raised by the RBI is the possibility of currency substitution. Stablecoins, whose underlying assets are often denominated in freely convertible foreign currencies, could lead to “cryptoisation” of the economy, resulting in currency mismatches on the balance sheets of banks, firms, and households in emerging markets. This, in turn, could disrupt an EMDE’s ability to establish domestic interest rates and manage liquidity conditions. The decentralized and borderless nature of crypto-assets also raises the risk of circumventing capital flow management measures, due to their pseudonymous characteristics.

Furthermore, stablecoins present an alternative to traditional financial systems, potentially interfering with banks’ capacity to mobilize funds and create credit by undermining credit risk assessment. Lastly, the report emphasized the challenges in tracking peer-to-peer transactions, which could increase the likelihood of illicit activities.

In light of these concerns, the RBI reiterated the need for global coordination and regulation. It called for a globally coordinated approach to analyze the risks faced by emerging markets and developing economies in relation to advanced economies. As part of India’s G20 presidency, the RBI aims to establish a framework for the global regulation of unbacked crypto-assets, stablecoins, and decentralized finance (DeFi).

Despite its reservations about stablecoins, the RBI has shown a more positive stance towards central bank digital currency (CBDC). It initiated a wholesale digital rupee pilot project in November and a retail digital rupee pilot project in February. Additionally, the RBI entered into an agreement with the Central Bank of the United Arab Emirates in March to explore a CBDC bridge for facilitating trade and remittances.

In conclusion, the RBI’s Financial Stability Report highlights the potential risks associated with stablecoins in emerging markets and developing economies. While recognizing the challenges of assessing financial stability risks in the crypto ecosystem, the RBI calls for global coordination to address these concerns. Simultaneously, the RBI continues to explore the potential benefits of central bank digital currencies in its pursuit of innovative financial solutions.

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