RBI Dy. Governor T. Rabi Sankar said stablecoins pose a bigger threat to economic stability than other cryptocurrencies. He also discussed the need for central bank digital currency (CBDC) to catch up with the digital payments boom. Sankar was speaking during a webinar organized by the Indian Council for Research on International Economic Relations (ICRIER).
He said introducing a CBDC would help avoid such a scenario. “From a dollarization perspective, a stablecoin is something that we will have to deal with much more seriously,” he said.
Why Does RBI See Stablecoins as a Threat?
Coinbase, a global crypto exchange, defines stablecoins as “a digital currency that is pegged to a ‘stable’ reserve asset such as the US dollar or gold. Stablecoins are designed to reduce volatility relative to cryptocurrencies not pegged like Bitcoin.
Sandeep Shukla, Professor of Computer Science and Engineering at IIT-Kanpur and co-director of the National Blockchain Project explained the process of how stablecoins work. He said that when a cryptocurrency or cryptocurrency is pegged to a unit of fiat currency (say a dollar), when someone buys it for a unit of fiat currency, the buyer is promised to receive in return his unit of the same currency when he sells it back to the issuer.
In other words, the coin is backed by an equivalent amount of reserve fiat currency with the issuer. Thus, the issuer must have saved as much fiat currency as the number of coins issued. These coins can then be used to buy other cryptocurrencies, or coins based on the price of that cryptocurrency/fiat coin.
“In this context, the stablecoin that comes to mind is Tether, which claims to be pegged to the US dollar – meaning that the issuer of Tether claims that it has enough dollars set aside that even if all owners of Tether coin together want to redeem their dollars by returning their Tether coins, the issuer will be able to do this.Unfortunately, the United States Commodities Futures Trading Commission (CFTC) has found that Tether is misleading the market, and that they didn’t have enough dollars in reserve, and Tether was fined $41 million in 2021 by the CFTC, so when a coin is considered a stablecoin, someone needs to check if the issuer of the coin actually owns the reserve or is misleading the public,” says Professor Shukla.
He also explained another problem plaguing Tether. It is issued by a company whose parent company also owns the Bitfinex exchange. “US banks have refused to do business with BitFInex due to Bitfinex’s poor reputation for encouraging ill-gotten crypto exchange (through ransom payments, darkweb market transactions, etc.) during their exchange,” he said.
Sharat Chandra, VP, Research and Analytics at EarthID, a blockchain company, said payment giants like Visa have started using USD Coin, a U.S. dollar-pegged stablecoin) to settle transactions on its network. . “FIS (Fidelity information systems), a leading fintech company, is the first global acquirer to offer direct USD Coin settlement, driving digital currency adoption for businesses. With effective regulation aimed at mitigating risks to financial stability, stablecoins would not threaten the current financial system,” adds Chadra.
Are Stablecoins suitable for India?
Opinions are divided on the relevance of the stablecoin in India.
Aruna Sharma, former secretary and member of the RBI Committee on Deepening Digital Payment, believes that while stablecoins have some sort of backup and security, cryptocurrencies lack such a foundation. They are speculative and constitute a virtual digital asset.
“So in that sense, stablecoins are like fixed deposits or mutual funds, compared to crypto, which are all speculative. This makes stablecoins more secure,” she adds.
Professor Shukla, however, considers stablecoins much more dangerous, because in the case of cryptocurrencies, investors, at least, know that they are very volatile and speculative, while stablecoins have the possibility of giving a false impression of stability.
“It (cryptocurrency) is akin to gambling, but stablecoins can give the false impression of stability and redeemability. But in reality, the stablecoin issuer might actually run away with your money after issuing you stablecoins against your fiat currency, and then when you go to redeem, they might be gone, after pulling the rug out from under your feet,” he said.
Sharma adds, “The virtual digital asset is an entirely different product. The need is to have regulations for KYC, AML and FEMA provisions. The delay and the dilemma of having regulation could cause other countries to take the lead and Indian players in the crypto world to migrate elsewhere. The signals of the exodus are already there.
What about the CBDC?
RBI Dy. Governor T. Rabi Shankar had on Friday, April 8, 2022, told reporters at a post Monetary Policy Committee press briefing that the RBI was now in a position to begin testing and running pilot projects of Central Bank Digital Currency (CBDC), as now, legislative empowerment has been done by the government, according to various media reports.
Shankar had said that the approach the RBI would take towards CBDCs would be calibrated and nuanced. “We will probably start with one driver and go from one to the other. The wholesale segment is probably the first one we will test, as it will be the easiest to implement. The other segments are more technology driven,” he said.
Harish Prasad, Head of Banking Services, FIS, says it is quite clear that the RBI is trying to strike the right balance on the proposed CBDC, keeping various considerations in mind.
“Chief 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 rather than hold demand deposits from banks. This could have a significant impact on the functioning of the banking system, as well as the cost of funds, and it is essential that this does not end up becoming a result of the proposed CBDC,” he says.
“It has been reiterated that holding money in the form of the proposed CBDC does not entitle you to any interest, and it solves that risk to some extent,” he adds.
Elsewhere, Sharma says Blockchain is spreading rapidly across India, and so it is important to have regulation to understand the speculative and fluid nature of crypto assets.