Stablecoins Bigger Threat To Indian Economy Than Cryptocurrencies?

RBI Dy. Governor T. Rabi Sankar has said that stablecoins present a bigger threat to economic stability than other cryptocurrencies. He also cited a need for central bank digital currency (CBDCs) to catch up with a boom in digital payments. Sankar was speaking at a webinar organised by the Indian Council for Research on International Economic Relations (ICRIER).

He said that introducing a CBDC would help avoid such a scenario. “From the point of view of dollarisation, stable currency is something that we will have to deal with far more seriously,” he said.

Why Does RBI Perceive Stablecoins As A Threat?

Coinbase, a global crypto exchange defines stablecoins as “a digital currency that is pegged to a “stable” reserve asset like the US dollar or gold. Stablecoins are designed to reduce volatility relative to unpegged cryptocurrencies like Bitcoin.” 

Sandeep Shukla, a professor of Computer Science and Engineering at IIT-Kanpur, and co-director of the National Blockchain Project explained the process by which stablecoins work. He said when a cryptocurrency or cryptocoin that is pegged to a unit of a fiat currency (say dollar), when someone buys it for one unit of fiat currency, the buyer is promised to receive back his one unit of the same currency when he sells it back to the issuer.

In other words, the coin is backed up by an equivalent amount of reserve fiat currency with the issuer. So, the issuer must have saved as much of the fiat currency as the number of coins issued. These coins can then be used to purchase other cryptocurrencies, or coins based on the price of that cryptocurrency/coin in fiat currency. 

“In this context, the stablecoin that comes to my mind is Tether, which claims to be pegged at US dollar – which means that the issuer of Tether claims that he/she has enough reserved dollar so that even if all owners of Tether coin together want to buy back their dollars returning their Tether coins, the issuer will be able to do that. Unfortunately, the US Commodities Futures Trading Commission (CFTC) has found that Tether was misleading the market, and they did not have enough dollars in reserve, and Tether was fined $41 million dollars in 2021 by CFTC. Therefore, when a coin is claimed to be a stablecoin, someone has to check if the coin issuer indeed possess the reserve, or, if they are misleading the public,” says Shukla.

He also elaborated on another issue plaguing Tether. It is issued by a company, whose parent company also owns Bitfinex exchange. “US banks denied to do business with BitFInex because of the ill-reputation of Bitfinex in encouraging an exchange of ill-gotten (through ransom payment, darkweb market transactions etc) crypto at their exchange,” he says.

Sharat Chandra, vice-president, Research and Strategy of EarthID, a blockchain firm, said that payment giants like Visa have started using USD Coin, a stablecoin pegged to the US dollar) to settle transactions on its network. “FIS (Fidelity information systems), a leading financial technology company, is the first global merchant acquirer to offer direct USD Coin settlement, thereby driving digital currency adoption for businesses. With effective regulations aimed at mitigating financial stability risks, stablecoins would not threaten the current financial system,” Chandra adds.

Are Stablecoins Suitable For India?

There is mixed opinion on the suitability of Stablecoin in India.

Aruna Sharma, former secretary, and member, RBI Committee in Deepening Of Digital Payment believes that while stablecoins have some sort of a backup and security, crypto currencies do not come with any such base. They are speculative and a virtual digital asset. 

“So, in that sense, stablecoins are like fixed deposits or mutual funds, as compared to crypto, which are all speculative. That makes stablecoins safer,” she adds. 

Prof. Shukla, however, considers stablecoins far more dangerous, because in case of crypto currencies, investors, at least, know that they are highly volatile and speculative, while stablecoins have the possibility of giving a false sense of stability. 

“It (crypto currency) is akin to gambling, but stablecoins may give false impression of stability, and redeemability. But in reality, the stablecoin issuer might actually run away with your money after issuing you stablecoin against your fiat currency, and then, when you go to redeem, they might be gone, having pulled off the rug beneath your feet,” he says.

Sharma adds: “Virtual digital asset is an entirely different product. The need is to have regulation for KYC, AML, and FEMA provisions. Delay and dilemma to have regulation could result in other countries taking the lead, and Indian players in the crypto world migrating elsewhere. Exodus signals are already there.”
 
What About CBDC? 

RBI Dy. Governor T. Rabi Shankar had on Friday, April 8, 2022, told reporters in a post monetary policy committee press conference that the RBI was now in a position to start off with testing and running pilot projects of Central Bank Digital Currency (CBDC), as now the legislative enablement has been done by the government, according to various media reports. 

Shankar had said that the approach the RBI would take towards CBDCs will be calibrated and nuanced. “We will probably start off with one pilot, and move on from one to the other. The wholesale segment is probably the first one we will try out, as it will be the easiest to implement. The other segments are more technology-intensive,” he had said.

Harish Prasad, head of banking, FIS says that it is quite clear that the RBI is trying to establish a fine balance on the proposed CBDC, keeping various considerations in mind. 

“Primary among these is the risk that CBDCs could pose to demand deposits within the banking system today, i.e., if people preferred to hold CBDCs over holding demand deposits with banks. This could have far-reaching impact on the functioning of the banking system, as well as to the cost of funds, and it is critical that this does not end up becoming an outcome of the proposed CBDC,” he says.

“It has been reiterated that holding money in the form of the proposed CBDC does not entitle the holder to any interest, and this addresses this risk to an extent,” he adds.  

Elsewhere, Sharma says that Blockchain is fast spreading across India, and so it is important to have a regulation to understand the speculative and fluid nature of crypto assets.