RBI calls for global regulation of stablecoin, lists risks for developing economies.
Stablecoin has the potential to cause significant harm to emerging markets and developing economies, according to the Reserve Bank of India (RBI) in its latest Financial Stability Report released on June 28. The report identified six threats associated with stablecoin.
The RBI has consistently been a critic of cryptocurrency, but it specifically highlighted the issues it sees with stablecoin “from an EMDE (emerging markets and developing economies) perspective.” Despite the lack of authenticated data and inherent data gaps in the crypto ecosystem hindering a proper assessment of financial stability risks, the report outlined six specific problems.
“The lack of authenticated data and inherent data gaps in the crypto ecosystem impede a proper assessment of financial stability risks.”
The report stated that stablecoin could pose a threat to an EMDE through currency substitution, as the underlying assets of stablecoin are typically denominated in freely convertible foreign currency. The widespread adoption of stablecoin could lead to currency mismatches “on the balance sheets of banks, firms, and households,” resulting in the “cryptoisation” of the economy.
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The RBI further explained that the presence of stablecoin in the economy could create challenges for an EMDE central bank in setting domestic interest rates and liquidity conditions. Additionally, the “decentralised, borderless, and pseudonymous characteristics of crypto-assets” make them appealing instruments for evading capital flow management measures.
Stablecoin could interfere with banks’ ability to mobilize funds and create credit by providing an alternative to the domestic financial system, undermining credit risk assessment. Lastly, the report highlighted that peer-to-peer transactions are difficult to track, increasing the potential for illicit activities.
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The RBI used this opportunity to reiterate its call for global coordination, stating:
“A globally coordinated approach is warranted to analyze risks posed to EMDEs vis-à-vis AEs (advanced economies). In this context, under India’s G20 presidency, one of the priorities is to create a framework for global regulation of unbacked crypto-assets, stablecoins, and DeFi.”
The RBI has shown more optimism towards central bank digital currency (CBDC). It initiated a pilot project for a wholesale digital rupee in November and a pilot project for a retail digital rupee in February. Additionally, it signed an agreement with the Central Bank of the United Arab Emirates in March to explore a CBDC bridge for facilitating trade and remittances.
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