Stablecoins

Stablecoins: The Digital Currency Revolution and Its Impact on India

What Are Stablecoins?

Stablecoins represent a revolutionary class of cryptocurrencies designed to maintain a stable value by being pegged to external assets such as fiat currencies, commodities, or other cryptocurrencies. Unlike volatile cryptocurrencies like Bitcoin and Ethereum, stablecoins aim to provide the stability of traditional currencies while leveraging the efficiency and accessibility of blockchain technology.

A stablecoin is essentially a digital asset issued by private companies as tokens on a blockchain, typically pegged to a fiat currency like the US dollar, and backed by reserves such as cash or highly liquid securities. The primary mechanism that ensures stability involves collateralization, where the issuer maintains reserves equivalent to the value of stablecoins in circulation.

How Stablecoins Work

Stablecoins operate through sophisticated mechanisms designed to maintain their pegged value. The process involves several key components:

Issuance Process: Users exchange fiat currency for stablecoins with the issuer, who holds equivalent fiat amounts in reserve and mints corresponding tokens on the blockchain. For instance, when someone deposits $10,000, the issuer holds this amount in reserve and creates 10,000 stablecoin tokens.

Maintaining the Peg: If the market price drops below the pegged value, traders can purchase the stablecoin at a discount and redeem it with the issuer for full value, pushing the price back up. Conversely, if the price rises above the peg, issuers can mint new coins and sell them into the market to increase supply and stabilize the price.

Reserve Management: The most crucial aspect involves maintaining adequate reserves. For fiat-backed stablecoins like USDC, approximately 90% of reserves are held in short-term US Treasuries or repurchase agreements, with the remainder in cash. This backing ensures holders can redeem stablecoins at any time for their underlying asset.

Types of Stablecoins

Stablecoins can be categorized into four main types based on their backing mechanisms:

Fiat-Backed Stablecoins: These maintain 1:1 backing by fiat currencies like USD, EUR, or GBP. Popular examples include Tether (USDT) and USD Coin (USDC). They offer higher stability due to fiat backing and are easily understood by users from traditional finance.

Crypto-Backed Stablecoins: Backed by other cryptocurrencies, these stablecoins are often overcollateralized to account for cryptocurrency price volatility. Dai (DAI) is a prominent example, backed by cryptocurrencies and maintained through smart contracts.

Algorithmic Stablecoins: These use algorithms and smart contracts to control supply and demand without relying on collateral. They automatically adjust token supply based on market conditions to maintain the peg.

Commodity-Backed Stablecoins: Pegged to tangible commodities like gold, silver, or oil, these stablecoins offer exposure to physical assets. Examples include PAX Gold (PAXG) and Tether Gold (XAUT).

Advantages of Stablecoins

Stablecoins offer numerous benefits that make them attractive for various use cases:

Price Stability: Unlike volatile cryptocurrencies, stablecoins maintain consistent value, providing a dependable method for storing money and conducting daily transactions.

Fast and Low-Cost Transactions: Stablecoins enable swift and affordable payment processing, particularly valuable for international transfers. They can settle payments in seconds or minutes at a fraction of traditional banking costs.

24/7 Accessibility: Users can access stablecoins at all times without requiring assistance from banks or financial institutions, needing only a crypto wallet and internet connection.

Global Financial Inclusion: For users in unstable economies or underbanked regions, stablecoins offer access to digital dollars without needing a bank account.

DeFi Integration: Stablecoins power various decentralized finance applications, including lending, yield farming, and liquidity provision, serving as preferred collateral and unit of account.

Transparency and Programmability: Built on public blockchains, stablecoins enable real-time tracking, reduce fraud risk, and support programmable payments through smart contracts.

Disadvantages and Risks

Despite their advantages, stablecoins face several significant risks and limitations:

Centralization and Counterparty Risk: Most popular stablecoins are managed by centralized entities that maintain control over backing reserves. This creates trust-based risks and potential for account freezing or regulatory penalties.

Regulatory Uncertainty: The evolving global regulatory environment creates uncertainties for stablecoin protocols, with government authorities enforcing rules that can influence user activity and platform operations.

De-Pegging Risk: Stablecoins can lose their value relationship due to market disasters or operational breakdowns. The collapse of TerraUSD (UST) in 2022, which lost 97% of its value within days, exemplifies this risk.

Transparency Concerns: Some stablecoin issuers face challenges in providing adequate proof that valid audits fully back their reserves, destroying user faith in the platform.

Technical Vulnerabilities: Smart contract-based stablecoins remain susceptible to program errors, oracle manipulation, and technical failures. There have been cases where vulnerabilities allowed attackers to mint new coins illegitimately.

Liquidity Risk: If stablecoin holders begin panic-selling or issuers reduce reserves, the peg can break quickly due to supply-demand imbalances.

Differences from Other Cryptocurrencies

Stablecoins fundamentally differ from traditional cryptocurrencies like Bitcoin and Ethereum in several key aspects:

Purpose and Use Case: Bitcoin serves as a store of value and hedge against inflation (“digital gold”), while Ethereum enables smart contracts and decentralized applications. Stablecoins, conversely, function as a medium of exchange and settlement asset for everyday transactions.

Price Volatility: Bitcoin experiences high volatility based on market demand and speculation, while stablecoins are designed to maintain price stability through their pegging mechanisms.

Supply Mechanism: Bitcoin has a fixed supply of 21 million coins with decreasing mining rewards, while stablecoins have elastic supply that can be minted and burned to meet demand and maintain the peg.

Trust Model: Bitcoin operates as a trustless, fully decentralized system using proof-of-work consensus, whereas most stablecoins are issued by centralized entities requiring trust in custodians and audits.

Interoperability: Bitcoin has limited cross-chain functionality unless wrapped, while stablecoins are designed for high interoperability across multiple blockchains like Ethereum, Solana, and Polygon.

Links with Traditional Currencies

Stablecoins create sophisticated links with traditional currencies through various pegging mechanisms:

Fiat Currency Pegging: Most stablecoins maintain 1:1 value ratios with underlying fiat currencies. For example, USDT and USDC are pegged to the US dollar, while Stasis Euro (EURS) is pegged to the Euro. This pegging ensures that one stablecoin token consistently represents one unit of the reference currency.

Reserve Backing: Fiat-backed stablecoins hold equivalent amounts of traditional currency in regulated bank accounts or government securities. Circle’s USDC, for instance, maintains reserves in government money market funds and cash deposits to ensure 1:1 redeemability.

Arbitrage Mechanisms: The link between stablecoins and traditional currencies is maintained through market forces. When prices deviate from the peg, traders exploit arbitrage opportunities by buying undervalued stablecoins and redeeming them for full currency value, or selling overvalued ones back to issuers.

Cross-Border Bridge: Stablecoins serve as digital representations of traditional currencies, enabling global transfers without the need for multiple currency conversions or correspondent banking relationships.

Market Size and Adoption Statistics

The stablecoin market has experienced remarkable growth, establishing itself as a cornerstone of the digital economy:

Market Capitalization: The total market capitalization of stablecoins reached $251.7 billion as of mid-2025, with projections suggesting growth to $1,023.6 billion by 2035 at a CAGR of 17.96%.

Transaction Volume: Stablecoins processed over $5.7 trillion in transactions in 2024, with a 66% surge in volume through Q1 2025. For the first time, stablecoins processed more transaction volume than Visa in Q1 2025, marking a significant milestone.

Daily Processing: USDT processes approximately $20-25 billion in daily transaction volume, while the overall daily volume of stablecoin transactions is around $100 billion.

Global Adoption: More than 500 million wallet addresses globally use stablecoins, with emerging markets driving 30% year-over-year growth. Stablecoins are actively used across more than 50 countries, particularly in regions with high inflation or limited banking access.

Regional Distribution: Ethereum hosts approximately 70% of total stablecoin supply, with Binance Smart Chain holding about 15%. The top five stablecoins (USDT, USDC, DAI, BUSD, and TUSD) account for roughly 90% of total market capitalization.

Impact on India

India’s relationship with stablecoins presents a complex landscape of opportunities and challenges, shaped by regulatory caution and growing unofficial adoption:

Current Regulatory Stance

India maintains a cautious approach toward stablecoins, with the Reserve Bank of India (RBI) expressing concerns about systemic risks. The country has not established dedicated stablecoin legislation, instead treating all cryptocurrencies as Virtual Digital Assets under general guidelines. According to a recent government document, India is inclined to maintain limited oversight rather than full regulation, fearing that legitimizing cryptocurrencies could make the sector systemic.

The RBI has stated that managing risks associated with cryptocurrencies through regulation would be difficult, and formal regulation could grant cryptocurrencies “legitimacy” and potentially cause the sector to become systemic. Despite this stance, the government recognizes that an outright ban would not effectively prevent peer-to-peer transactions or trading on decentralized exchanges.

Growing Unofficial Adoption

Despite regulatory uncertainty, stablecoin adoption in India is surging. By some estimates, there are 314 million stablecoin holders in India—the most in the world. Indians are increasingly using USD-pegged stablecoins like USDT and USDC for cross-border payments, portfolio diversification, and remittances through offshore exchanges in legal grey zones.

Use Cases in India:

• Cross-Border Remittances: India, as the world’s largest recipient of remittances ($125 billion in 2024), could benefit significantly from stablecoins’ ability to reduce transaction costs from 7.21% to approximately 1.43% of transaction value.

• Portfolio Investment: Indians use stablecoins for lower-risk on-chain exposure, seeking stability and liquidity.

• Trading and Exchange: Stablecoins serve as intermediary assets for cryptocurrency trading on registered exchanges.

Economic Implications

Potential Benefits:

• Remittance Efficiency: Stablecoins could transform India’s remittance economy by enabling instant, low-cost transfers for the 36 million diaspora sending money to India.

• Financial Inclusion: Could provide alternatives to high-cost services like Western Union and enable access for underbanked populations.

• Digital Infrastructure Leverage: India’s robust Digital Public Infrastructure, including UPI and Aadhaar covering 900 million smartphone users, could facilitate stablecoin integration.

Risks and Concerns:

• Monetary Sovereignty: Stablecoins could disrupt financial stability and impact India’s monetary policy, potentially increasing income inequality.

• Dollarization Risk: Foreign-issued stablecoins might undermine local monetary policy and reduce the effectiveness of RBI’s currency management tools.

• Illicit Activities: Research highlights the use of stablecoins by illicit addresses, which could escalate problems of terror funding and money laundering.

Tax and Regulatory Challenges

Indian stablecoin users face significant tax burdens, with a 30% flat tax on gains and 1% tax deducted at source (TDS), without the option to offset losses. This creates operational complexity and has led to shifts toward more complex financial products.

The lack of clear regulatory framework creates compliance challenges, particularly around anti-money laundering (AML) and know-your-customer (KYC) requirements. The inconsistent classification under the broad “Virtual Digital Assets” category is stalling legitimate innovation.

Central Bank Digital Currency (CBDC) Competition

India is pursuing its own Central Bank Digital Currency (e-rupee) as an alternative to private stablecoins. The RBI published a concept note on CBDC in 2022 and is conducting pilots before public deployment. The e-rupee’s circulation reached Rs 1,016 crore by March 2025, though growth remains cautious.

The competition between unregulated private stablecoins and RBI’s CBDC represents a contest for public trust in digital currency. While RBI positions CBDC as the most trusted form of digital currency for Indians, it remains to be seen what specific use cases it will address compared to private stablecoins.

Future Outlook

Industry stakeholders advocate for use-case-specific regulation rather than blanket approaches, particularly for cross-border transactions. The passage of the US GENIUS Act has created pressure on Indian policymakers to formulate a differentiated framework that could legitimize stablecoins under regulatory supervision while protecting users from systemic risks.

Potential regulatory approaches could include:

• Licensing Frameworks: Requiring stablecoin issuers to maintain 1:1 backing with safe, liquid assets.

• Regulatory Sandboxes: Using RBI’s existing frameworks to test stablecoin applications in controlled environments.

• International Cooperation: Aligning with global standards from organizations like the Financial Action Task Force (FATF).

The decision on stablecoin regulation could significantly shape India’s role in the evolving global financial architecture, given the country’s 20 million crypto users and rising fintech activity. The challenge lies in balancing innovation potential with financial stability concerns while addressing the growing informal adoption that is already occurring outside regulatory frameworks

Context: The Hindu