Are stablecoins merely redundant in a financial system anchored by traditional fiat money? This question has gained prominence following recent comments from a senior Reserve Bank of India (RBI) official. The debate, however, reveals a deeper function of these digital assets that extends beyond their intended use.
The RBI's Stance and the Counter-Argument
At a recent Mint conference, RBI Deputy Governor T. Rabi Sankar responded to a query on the role of stablecoins by stating they serve no purpose that fiat currency cannot. While this view underscores the central bank's cautious approach, a compelling counter-perspective exists. Stablecoins do play a significant role within the contemporary fiat-money ecosystem—not by aiming to replace it, but by overlaying it with a perceived layer of stability.
This perception, however thin, is crucial. The demand for 'stability' that stablecoins represent allows us to envision an alternative financial reality. Fiat currencies, backed fundamentally by the promise of a nation-state, have historically been marked by power imbalances. Sovereign defaults, currency debasement, and episodes of hyperinflation litter economic history, demonstrating that both fiat and even gold-backed currencies are susceptible to instability.
The Historical Cycle: Demand Breeding Risky Innovation
Such uncertainty naturally fuels a search for alternatives, which in turn creates its own supply. A prime example is the 2008-09 global financial crisis. It was partly driven by a global demand for stable, top-rated securities. This demand was met through complex financial engineering, like repackaging risky US mortgages into 'AAA'-rated collateralized debt obligations.
Ironically, the collapse of this system gave birth to another innovation: cryptocurrencies like Bitcoin. They promised freedom from sovereign control but introduced wild volatility and security risks. The subsequent demand for a less volatile crypto asset led to further engineering. The solution was to back a cryptocurrency with real-world assets, like short-term US Treasury bills, creating a composite derivative structure. To market this construct, a reassuring name was needed—thus, 'stablecoin' was born.
Today, numerous stablecoins, primarily in the US, maintain their value by being pegged to assets like the dollar. This brings us to the core disagreement with the RBI deputy governor's assertion.
Stablecoins as a Confidence Barometer
The unique purpose served by stablecoins lies in the realm of perception and measurement. Fiat currencies do not carry the same 'wishful thinking' as stablecoins. Since the entire financial system operates on collective belief, an asset class that attracts investors willing to invest in an extra dose of hope serves a functional purpose. Policymakers can measure this demand and glean valuable insights from it.
India's own crypto policy, despite its ambiguities, offers an illustration. The tax treatment—where gains are taxed at slab rates but losses cannot be offset—creates friction. Yet, demand persists, partly driven by 'Fear Of Missing Out' (FOMO) on trends seen among American investors.
This overlooks India's significant progress in building a public digital infrastructure. The Unified Payments Interface (UPI) has minimized settlement risk, Aadhaar has solved identification at scale, and the digital rupee (e₹) aims to offer programmable money with sovereign backing.
Therefore, stablecoins perform an unintended but useful function. They reveal segments of demand willing to suspend disbelief in exchange for a private promise of stability. For regulators, this is not a threat but a critical signal—a proxy indicator of confidence in the domestic fiat currency. While openly discussing this signalling value may be challenging, it serves an undeniable informational purpose.
In conclusion, dismissing stablecoins as superfluous misses their role as a diagnostic tool. They reflect underlying anxieties and aspirations within the financial system, offering policymakers a unique lens to gauge public trust in traditional money, a function that fiat currency itself cannot perform.
