Opinion The false promise of rupee-backed stablecoins

Much of the current enthusiasm rests less on demonstrated need and more on fashionable narratives. Stablecoins promise efficiency, but often conceal fragility. Unlike central bank money, they are backed by private reserves, leaving them exposed to “digital bank runs” if confidence falters. Global regulators, including the US Financial Stability Oversight Council, have warned that the market is dangerously concentrated in a handful of issuers and a single failure could ripple through the system. The Bank for International Settlements has compared them to the chaotic “free banking” era, when competing forms of private money weakened trust and stability.

Even the United States, which recently enacted the 2025 GENIUS Act to regulate stablecoins, recognises this fragility and requires issuers to hold reserves in Treasuries and other safe assets. Yet worries continue that without a central bank backstop, the risk of destabilising digital bank runs remains unresolved. To import such a construct into India, with its calibrated monetary framework, would be less innovative than folly.

Why should the American experiment be our reference point in the first place? The United States operates on deep liquidity, large debt and the privilege of the dollar as the world’s reserve currency. It has also exported repeated crises to the rest of the world. For India, whose stability rests on careful regulatory design and credible supervision, emulating US experiments in private money risks undermining the very strengths we have built.

Globally, stablecoins gained traction not by transforming retail finance but by lubricating cryptocurrency trading, giving speculators a supposedly stable unit of exchange. In India, crypto assets remain outside the regulatory perimeter and are subject to taxation and compliance obligations. To legitimise stablecoins here would be to create a high-frequency, offshore-facing channel for capital flows that circumvents supervision. At a policy level, this is tantamount to ceding control over capital movements to privately issued tokens – a step no responsible regulator should take.

In emerging economies, dollar-backed stablecoins act as de facto foreign currencies, creating a form of algorithmic dollarisation that bypasses domestic monetary authority. For India, with its actively managed exchange rate and calibrated capital account, such leakage could weaken policy effectiveness and erode sovereignty.

Some argue that plugging stablecoins into India’s digital architecture — UPI, Aadhaar, or the Digital Rupee — could yield synergies. But this misunderstands why those platforms succeeded. UPI works because it is sovereign-backed, interoperable and trusted. Aadhaar expanded access precisely because it was embedded in a public architecture. The Digital Rupee pilot is designed with the safeguards of central bank money, marrying efficiency with trust. To layer private stablecoins on top of this is simply unnecessary.

India’s financial system has shown resilience and credibility. Banks are better capitalised, credit quality has improved, and regulation has been proactive. We have weathered global shocks without exotic constructs. Stability is already present. It does not need to be reinvented through private tokens whose track record elsewhere is patchy at best.

Which brings us to the larger question: what really changes when a new technology enters finance? Are we solving a genuinely new problem, or merely repackaging an old one in better code? Ambition in finance is admirable, but it must be tempered with prudence. Stablecoins may be fashionable in certain markets, but India’s context is different. Here, innovation must reinforce stability, not substitute it.

India does not suffer from the regulatory trust deficits that have plagued lightly supervised Western financial markets, where the revolving door between regulators and financial firms has too often eroded oversight. Indian financial supervisory credibility should not be gambled away on the illusion of stability that stablecoins offer.

To call them the “future of finance” while ignoring their resemblance to free banking chaos is, at best, amnesia and at worst, wilful blindness.

Perhaps the most ironic of all is this: lobbying for an untested, privately issued digital token as a way to enhance stability in one of the most stable emerging market systems in the world. It is like proposing a parachute made of paper to improve aviation safety.

The writer is a corporate advisor and author of Family and Dhanda