Paper: GS – III, Subject: Economy, Topic: Trade and External Sector, Issue: Significance of stablecoins as an alternative.
Context:
As Global financial instability due to USD volatility, geopolitical tensions (Russia-Ukraine, Israel-Iran), and trade disruptions is increasing, India, as the world’s largest recipient of remittances ($125 billion in 2024; 3.2% of GDP), is significantly impacted by friction in cross-border payments.
Key Highlights:
What are Stablecoins?
- They are cryptocurrencies which are pegged to stable assets like USD or gold thereby minimizing price volatility.
- They are built on blockchain, unlike volatile cryptos like Bitcoin.
- They also serve as a medium of exchange with scalability and reliability.
Benefits of such Tokenization and Blockchain:
- Competitiveness: It improves trade competitiveness by digitizing assets and embedding smart contracts for security, limits, and transparency.
- Reduced risks: It reduces credit risk and delays in global trade and also lowers financing costs using blockchain-secured tokenized contracts.
- Leveraging potential: India can become a Web 3.0 innovation hub with 1.2 million developers and 4.5 million skilled blockchain professionals. It also enables secure, and global job access for freelancers.
Case studies: Cross-border Remittances:
- Cost convenience: Stablecoins can reduce transaction costs of remittances (as low as $0.01 per $200).
- Instant payments: It enables instant, 24/7 international transfers.
- Serving diaspora: Remittances serve 36 million diaspora sending money to India.
- Alternative: It provides alternatives to high-cost services like Western Union.
India’s Advantage in using this mechanism:
- Digital Public Infrastructure: India’s DPI includes UPI and Aadhaar, covering 900 million smartphone users and 1.3 billion Aadhaar holders.
- High volume transactions: Processed 185 billion transactions in 2024–25 which shows the significance of DPI.
- Transactions convenience: DPI enables low-cost, real-time payments and seamless KYC.
Role of RBI:
- RBI initiatives:
- Central Bank Digital Currency (CBDC).
- Regulatory sandbox for blockchain innovation.
- E-rupee for secure digital transactions.
In this context, Stablecoins could complement CBDC for remittance use cases.
Way ahead:
- Interoperable regulation: Need for interoperable regulation between KYC and anti-money laundering (AML) standards.
- Training: Blockchain hackathons and NEP skill training can be conducted to boost this.
- Ensuring reliability: Stablecoins must be secure, scalable and transparent (for FDI compliance). It must not undermine India’s macroeconomic stability.
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