STABLE COINS

06.10.2025

STABLE COINS

Context
India’s Finance Minister Nirmala Sitharaman emphasized the need for comprehensive strategies to regulate stable coins, reflecting global concerns over their growing influence in the digital economy. As their use rises in international transactions, nations are assessing both their benefits for cross-border payments and risks to financial stability.

Definition
Stable coins are privately issued digital assets designed to maintain a steady value by being pegged to tangible assets such as fiat currency, commodities, or baskets of assets. Unlike volatile cryptocurrencies like Bitcoin, they aim for price stability, making them suitable for daily payments, trade, and remittances.

How They Work
Each stable coin unit represents a fixed value of an underlying asset—such as the U.S. Dollar, Euro, or Gold. The issuer maintains collateral reserves (cash, bonds, or assets) ensuring that the coin can be redeemed at a stable rate. This backing mechanism protects users from extreme price volatility.

Types of Stable Coins

• Fiat-Collateralized: Backed by traditional currencies kept in reserves (e.g., Tether–USDT, USD Coin–USDC).
• Crypto-Collateralized: Backed by other cryptocurrencies, often over-collateralized (e.g., DAI).
• Commodity-Backed: Pegged to assets like gold (e.g., PAX Gold–PAXG).
• Algorithmic: Use supply-demand algorithms instead of reserves (e.g., TerraUSD–UST), though prone to instability.

Global Context and Regulation
The global stable coin market is valued at over $130 billion. Regulators highlight issues like insufficient transparency, weak reserve practices, and potential misuse.

• EU: Introduced MiCA (Markets in Crypto-Assets) regulation.
• U.S.: Working on federal legislation for reserve and consumer protection.
• G20/FSB: Developing a coordinated global framework for oversight.

India’s Position
India adopts a cautious approach toward privately issued digital assets.

• Finance Minister’s Stand: Advocates global coordination for managing risks.
• RBI’s Role: Prefers developing its own Central Bank Digital Currency (CBDC) as a safe alternative.
• Policy Focus: Evaluating impacts on capital flow, monetary control, and national financial security.

Benefits and Risks

• Benefits: Stable value, faster cross-border transactions, improved financial inclusion, and support for decentralized finance (DeFi).
• Risks: Reserve opacity, regulatory gaps, systemic collapse (as in Terra-Luna 2022), and threats to monetary sovereignty.

Future Outlook
Stable coins are expected to play a larger role in global finance, provided strong regulatory mechanisms ensure transparency and consumer trust. India supports G20-wide norms to balance innovation with stability, seeing regulated stable coins and CBDCs as crucial to the future of secure digital finance.

Conclusion
Stable coins combine currency stability with blockchain efficiency, but their rapid expansion demands international governance. India’s proactive engagement highlights the need for responsible innovation that safeguards financial integrity while embracing digital transformation.