Why in news?

RBI Governor Sanjay Malhotra urged global central banks to adopt and promote Central Bank Digital Currencies (CBDCs) over stablecoins for cross-border payments.

Speaking at the World Bank–IMF annual meeting in Washington, DC, he reiterated India’s caution on cryptocurrencies, citing risks to monetary policy, capital flows, and financial integrity, including money laundering concerns.

What’s in Today’s Article?

• Stablecoins
• Central Bank Digital Currency (CBDC)
• Promoting CBDCs
• Shift in Government’s Tone on Stablecoins

Stablecoins

• Stablecoins are a type of cryptocurrency designed to maintain a stable value by being pegged to a reserve asset such as a fiat currency (like the US dollar), a commodity (like gold), or a basket of assets.
• Key Features:
  • Aim to reduce price volatility common in cryptocurrencies like Bitcoin or Ethereum.
  • Backed by collateral reserves, algorithms, or a combination of both.
  • Enable faster and cheaper transactions across borders compared to traditional banking systems.
• Types of Stablecoins:
  • Fiat-backed Stablecoins: Backed by reserves of fiat currency (e.g., Tether (USDT), USD Coin (USDC)).
  • Crypto-backed Stablecoins: Collateralised by other cryptocurrencies (e.g., DAI).
  • Algorithmic Stablecoins: Maintain value through algorithms that control supply and demand (e.g., UST – now defunct).
• Risks and Concerns:
  • Regulatory uncertainty and lack of global standards.
  • Reserve transparency and liquidity risks if not fully backed.
  • Potential for financial instability and “dollarisation” in developing countries.

Central Bank Digital Currency (CBDC)

• CBDC is the legal tender issued by a central bank in a digital form.
  • E.g., CBDC of India is the digital form of the Indian rupee, issued and regulated by the RBI.
• It represents sovereign currency in an electronic form and is backed by the full faith and credit of the government, just like physical cash.
• Types of CBDC in India
  • Retail CBDC (e₹-R)
    • Meant for use by the public, including individuals and businesses.
    • Functions as a digital alternative to cash for everyday transactions.
    • Pilot launched in December 2022 in select cities.
  • Wholesale CBDC (e₹-W)
    • Designed for financial institutions to settle interbank transfers and securities transactions efficiently.
    • Aims to improve the speed, transparency, and cost-effectiveness of large-value payments.
    • Pilot project to use digital rupee in the wholesale market for secondary trade in government securities (G-secs) was launched in November 2022.
• Objectives
  • To reduce dependence on physical cash and printing costs.
  • To enhance payment efficiency and financial inclusion.
  • To support cross-border payments and improve monetary policy transmission.
  • To provide a secure, sovereign alternative to private cryptocurrencies and stablecoins.

Promoting CBDCs

• Speaking at the IMF–World Bank annual meeting, RBI Governor urged central banks worldwide to promote Central Bank Digital Currencies (CBDCs) over stablecoins to facilitate international payments.
• He argued that CBDCs, being fiat-backed and tokenisable, offer the benefits of stability, monetary integrity, and the singleness of money — advantages that private stablecoins cannot ensure.
• He emphasised that global adoption was crucial for realising CBDCs’ full potential in cross-border transactions and urged coordinated promotion among central banks.
  • The RBI is currently conducting pilot projects for both retail and wholesale CBDCs, focusing on their potential to ease cross-border settlements, as domestic payment systems in India are already efficient.
• RBI Governor reiterated India’s longstanding caution on cryptocurrencies, warning that their use could affect monetary policy, capital flows, and financial integrity, particularly through money laundering risks.

Shift in Government’s Tone on Stablecoins

• RBI Governor’s remarks come soon after Finance Minister Nirmala Sitharaman indicated a more open stance toward stablecoins.
• Recently, she said stablecoins and similar innovations were transforming global finance and forcing nations to adapt or risk exclusion from evolving monetary systems.
• She noted that while countries may differ in response, none could insulate themselves from systemic change in global finance.
• Rising Global Acceptance of Stablecoins
  • Across major economies, stablecoins — private digital currencies pegged to fiat currencies like the US dollar — are gaining regulatory acceptance:
    • In June 2025, the US Senate passed the GENIUS Act to regulate stablecoins.
    • South Korea’s National Assembly introduced the Digital Asset Basic Act, allowing firms to issue won-backed stablecoins.
    • Hong Kong passed a stablecoin licensing law in May 2025 for local issuers.
  • Governments see such frameworks as ways to strengthen their currencies’ global roles.
  • US govt argued that stablecoins could boost demand for US Treasuries, lower borrowing costs, and reinforce dollar dominance.
    • Currently, Tether and USDC, both pegged to the US dollar, command 90% of the $285 billion global stablecoin market.
• RBI’s Concerns
  • The RBI has consistently warned that widespread use of US dollar-backed stablecoins could lead to the dollarisation of India’s economy, reducing the rupee’s role in domestic transactions.
  • Such a shift could weaken India’s monetary sovereignty, as the RBI and government would lose control over the supply and circulation of the US dollar in domestic markets.