In an age where digital currencies are gaining traction globally, India’s Deputy Governor T. Rabi Sankar has ignited a debate by asserting that stablecoins are not only unnecessary but also pose significant risks to the country’s financial ecosystem. With India’s payment infrastructure already robust and efficient, the discussion focuses on the imperative of central bank digital currencies (CBDCs) as the future of financial transactions.
The Case Against Stablecoins
Stablecoins, which are digital assets pegged to fiat currencies, seem alluring due to their promise of transaction stability and efficiency. However, Deputy Governor Sankar argues that they fundamentally lack critical attributes of true money. He emphasizes that these currencies are
“structurally unsuitable to anchor a financial system” Deputy Governor T. Rabi Sankar
because they often lack fiat backing and a unified regulatory framework. This deficiency can lead to significant trust issues within the currency landscape.
Sankar further outlines that stablecoins not only risk undermining confidence in the monetary system but also pose threats to monetary stability, banking operations, and compliance. He pointedly states,
“This leaves little justification for their integration into the financial system, even before considering the broader risks they pose” Deputy Governor T. Rabi Sankar
In essence, the case against stablecoins hinges on their inability to replicate the stability and trust vested in traditional fiat currencies.
India’s Robust Payments Landscape
India’s payment systems are already world-class, featuring highly effective platforms like the Unified Payments Interface (UPI), Real-Time Gross Settlement (RTGS), and National Electronic Funds Transfer (NEFT). These systems handle millions of transactions daily, showcasing the country’s efficiency in managing financial exchanges without the need for private digital alternatives. Sankar praised this infrastructure, noting it provides “fast, low-cost, and secure payment capabilities to millions of users,” underscoring India’s readiness to embrace innovations in finance without turning to potentially risky stablecoins.
Given this existing framework, the argument for stablecoins seems even weaker. With the current systems efficiently meeting domestic payment needs, the introduction of stablecoins could complicate an already successful landscape. The focus, therefore, should remain on strengthening and innovating within the established systems rather than integrating unstable and risky digital alternatives.
CBDC: A Sovereign-Backed Alternative
As a solution to the issues posed by stablecoins, the adoption of Central Bank Digital Currencies (CBDCs) is presented as a superior alternative. CBDCs are digital tokens that are not just another form of cryptocurrency, but rather sovereign-backed instruments that fulfill all the roles stablecoins claim to offer without the associated risks. According to Sankar,
“They can perform all the functions stablecoins claim to offer, such as programmability, atomic settlement, and lower cross-border frictions, while being fully anchored within the existing financial system.” Deputy Governor T. Rabi Sankar
This assertion highlights the dual benefits of CBDCs: maintaining regulatory oversight and ensuring monetary security. By encouraging the use of CBDCs domestically and structuring them to resemble physical cash—maintaining user anonymity for small transactions—Sankar believes trust can be fostered while simultaneously safeguarding the banking sector from disintermediation risks.
Solving Cross-Border Payments
Stablecoins often tout their utility in the realm of cross-border payments, claiming significant advantages in terms of cost and speed. However, the Deputy Governor suggests that similar efficiencies can be realized through bilateral or multilateral CBDC arrangements. By interlinking platforms like UPI with other global payment systems, India can lead initiatives fostering interoperable CBDC solutions among emerging markets that could streamline international transactions.
The efforts to integrate these fast payment systems directly contribute to the G20 goals of enhancing the affordability and speed of cross-border payments. For instance, recent linkages between UPI and several partner jurisdictions are projected to effectively reduce the reliance on private digital currency alternatives for remittances, proving that innovation need not come at the cost of stability.
A Global Choice of Foundations
Sankar’s critique touches on broader implications, drawing parallels with the lessons of history regarding monetary stability. As he put it,
“Can we afford to experiment with the foundations of global monetary and financial stability that have been carefully built over the years for instruments that lack the safety features of money?” Deputy Governor T. Rabi Sankar
This inquiry reflects a cautionary stance towards the integration of unstable private currencies into an established financial system.
Ultimately, the choice before us is clear: we can either choose to reinforce existing monetary mechanisms using proven frameworks or risk repeating historical mistakes by relying on untested digital currencies with potentially profound societal costs. “Stablecoins do not serve a purpose that cannot be served better by fiat money,” he remarked, casting doubt on their validity in light of the overarching need for systemic stability.
The Path Forward: Innovations with Trust
India stands at a crossroads in its financial narrative. The emphasis on strengthening a resilient domestic financial system equipped with CBDCs, rather than dabbling in the uncertain waters of stablecoins, may very well define the nation’s economic future. By capitalizing on existing efficiencies and pioneering new, safe technologies, India can lead the charge in shaping a secure, innovative financial landscape that fosters trust and stability.
