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The stablecoin has the potential to hurt emerging markets and emerging economies, the Reserve Bank of India (RBI) said in its latest Financial Stability Report released on June 28. The report lists six threats that the stablecoin poses.
The RBI has been a staunch critic of cryptocurrencies, but has been especially clear about the issues it sees with stablecoin “in terms of EMDE [развивающиеся рынки и развивающиеся страны]”. It lists six specific issues though:
“The lack of authenticated data and inherent data gaps in the cryptocurrency ecosystem hinder a proper assessment of financial stability risks.”
The report argues that the stablecoin could threaten EMDE through currency substitution because its underlying assets tend to be denominated in freely convertible foreign currencies. The “cryptoization” of the economy that could result from the widespread adoption of stablecoins could lead to currency mismatches “on the balance sheets of banks, firms, and households.”
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The central bank EMDE may face challenges in setting the domestic interest rate and liquidity conditions due to the presence of the stablecoin in the economy, the RBI continued. In addition, “decentralized, borderless and pseudonymous characteristics of crypto assets […] make them potentially attractive tools for bypassing capital flow controls.”
As an alternative to the national financial system, a stablecoin could prevent banks from raising money and creating credit, undermining credit risk assessments. Finally, the report states that peer-to-peer transactions are difficult to trace, which can increase the likelihood of them being used in illegal activities.
Related: India explores offline CBDC functionality – RBI chief executive
The RBI took the opportunity to reiterate its call for global coordination. He said:
“A globally coordinated approach is needed to analyze the risks associated with EMDEs in relation to AE [развитым странам].[…] In this context, under the Indian G20 Presidency, one of the priorities is to create a framework for global regulation of fiat crypto assets, stablecoins and DeFi.”
The RBI was more bullish on the central bank digital currency (CBDC). In November, the company launched a wholesale digital rupee pilot, followed by a retail digital rupee in February. In March, it also signed an agreement with the Central Bank of the United Arab Emirates to explore the CBDC bridge to facilitate trade and remittances.