The Clamour for a Rupee-Backed Stablecoin

The demand for a rupee-backed stablecoin is putting pressure on the Government of India (GoI) to regulate and regularize its use. This movement has gained momentum following the collapse in the USDT (Tether) stablecoin premium over the US dollar, which disrupted the use of stablecoins for transferring foreign currency to India.

Background and Popularity of Stablecoins

• Stablecoins were introduced in 2014 with BitUSD and Tether (USDT), facilitating swift payments on US crypto exchanges.
• Globally, stablecoins have an estimated market capitalization of $280 billion, with 99% pegged to the US dollar.
• Stablecoins offer the advantages of cryptocurrencies without the volatility, being pegged to currencies and associated treasury bills (T-bills) and g-secs.

Indian Context and Developments

Indian crypto enthusiasts are advocating for a ₹-backed stablecoin, promising benefits like promoting India's e-₹ (CBDC). The GENIUS Act 2025 in the US further intensified these efforts.

• GoI, despite RBI's reservations, is exploring the need for stablecoin regulation, to be discussed in the Economic Survey on January 31, 2026.
• Two firms, Polygon and Anq, are developing ARC (asset reserve certificate), India’s first ₹-backed stablecoin, for launch in 2026.

Challenges and Concerns

• Transaction Costs and Conversion:
  1. Conversion to fiat currency incurs fees, potentially negating the benefits of swift and cost-effective cross-border transactions.
  2. Use of e-₹s may not eliminate these fees unless RBI intervenes.
• Regulatory Hurdles:
  1. Payment speed is constrained by anti-money laundering (AML) and other regulatory protocols, which may not be relaxed.
• Internationalisation:
  1. Success depends on foreign demand for rupees, based on currency stability, treasury desirability, trade flows, and potential appreciation.
• Risks of Stability:
  1. Stablecoins, pegged 1:1 against the rupee, are supposed to be stable, collateralized against T-bills and FDs, but this might not ensure practical stability.
  2. Short-term T-bills could reduce profitability, leading to risky investments and potential maturity mismatches.
  3. High leverage and debt in fintech could result in bankruptcy, market panic, and financial instability.
• Market Dynamics:
  1. ₹-backed stablecoins could divert bank deposits, being used primarily for speculative crypto-asset trading, which is mostly dollar-denominated.

Conclusion

While a ₹-backed stablecoin aims to drive internationalisation, its success largely hinges on demand rather than technological advancements. Given the potential risks and the precedence of countries like China halting stablecoin development to protect monetary sovereignty, India must carefully evaluate its position to avoid future challenges.