~Madhvendra Jha (B.A. LL.B. (Hons.) student at Dr. Ram Manohar Lohiya National Law University, Lucknow)
Introduction
Finance Minister Nirmala Sitharaman has recently stated that India should prepare itself to engage with crypto assets, like stablecoins that can transform the landscape of money and capital flows. Stablecoins are virtual digital assets (“VDAs”) issued by private companies as tokens on a blockchain, typically pegged to a fiat currency and backed by reserves such as cash or highly liquid securities.
According to the Chainalysis report, India has been a key driver of cryptocurrency adoption in the Asia-Pacific region, ranking first globally for two consecutive years. Despite this, cryptocurrencies occupy a curious position - they are taxed, but not legalised. The government levies a 30% tax on digital assets, yet refuses to recognize them as legal tender. While at many instances, the Reserve Bank of India (“RBI”) has shown hesitation in adopting stablecoins, citing its potential risks, like currency substitution and loss of monetary sovereignty. Instead they urge the banks to use and promote the Central Bank Digital Currencies (“CBDCs”) or Digital rupee as a mode to facilitate global payments. Despite these ambiguities, innovation continues, the blockchain unicorn Polygon, in along with the fintech startup Anq, is developing India's first sovereign-backed stablecoin- ARC. It is uniquely designed to be fully collateralised by government securities and Treasury Bills.
Although the government is beginning to experiment with stablecoins, India still trails global peers in their widespread adoption and practical application. Through this piece, author contends that India must adopt stablecoins, complementing the existing CBDC pilot program. It critiques the current underperformance of CBDC, evaluates the systemic utility of stablecoins, examines comparative global regulatory models and finally, concludes by recommending a harmonised model suited to India’s digital-finance ecosystem.
CBDC: A Flop Show
CBDC (popularly known as E-rupee) is a tokenised digital version of the Indian rupee, issued by the RBI and was launched in November 2022 as a pilot project. The incentive behind this initiative was to drive the nation towards a more cashless economy, strengthen payment system resilience and promote innovation by enabling faster, secure and traceable transactions. Even though the government is building more infrastructure, CBDC accounted for less than 0.0001 of the digital payments in FY 2023 - 24 and accounts for only a tiny fraction (0.006%) of the total banknotes in circulation. The main reason behind their miniscule use is the dominance of Unified Payment Interface (“UPI”) in day to day transactions which offers convenient payment in decimals as compared to CBDC as it only has limited denominations from 50 paise to Rs 2,000. Apart from that, there is no significant incentive available for the public to switch to E-rupee and no significant marketing initiatives have been placed by the banks and fintech startups due to lack of interest. Privacy and cybersecurity concerns regarding CBDC is also rising among the citizens that make them lose trust in digital rupee for daily use.
This is not just an India problem, countries around the world have faced similar problems in adopting CBDCs. Once hailed as the first country to roll out the CBDC, Ecuador’s digital cash (dinero electronico or DE) failed within the first four years of its inception. The main reason it couldn't take off was the lack of trust in government as compared to public banks and its inability to improve financial inclusion. China's e-Yuan also failed due to the rise of private payment providers (like WeChat Pay & Alipay) and the integration of China’s Social Credit System for surveillance. The Nigerian model of forced adoption through aggressive demonetization and cash redesign policies caused economic disruption and cash shortages.
Need for Stablecoins Regulation in India
The shortcomings of CBDC adoption highlight the need for a complementary alternative, making stablecoins a practical solution. India now channels nearly 58% of its on-chain foreign-exchange activity through stablecoins, placing it eighth globally in stablecoin flows. Stablecoin’s rising adoption shows that the “crypto is niche” argument no longer holds. As large volumes move without prudential safeguards, risks of illicit cross-border transfers and capital flight vulnerabilities increase. Proper legislation and adoption could save Indian users and businesses up to $10 billion annually in transaction fees.
For a decade, India is the highest recipient of remittance around the world receiving nearly $135 billion in FY 2024 - 25 itself, an increase of 14% from the last year, contributing 3.5% to its GDP. Traditional remittance channels, like banks, often impose high fees and involve lengthy processing times. In response to these challenges, India’s diaspora has increasingly turned to stablecoins like USDC and Tether (USDT), significantly reducing transaction fees to below 3% in many cases and accelerating transfer times. It also provides a hedge against currency volatility, ensuring recipients retain the value of their funds, especially during periods of rupee depreciation. In high-dependency economies like India, integrating blockchain-based remittance systems could inject billions of dollars into local economies. Therefore, instead of creating dedicated CBDC corridors with countries like the UAE, governments could simply leverage stablecoins for international payments.
India’s export engine now surpasses $250 billion annually, powered significantly by MSMEs, which account for nearly 45% of all outbound trade. Thus, stablecoins are also beneficial for India’s SMEs and exporters facing delayed SWIFT settlements and high banking costs. They enable instant, low-friction cross-border payments, support non-USD trade, and allow MSMEs to use tokenized escrows for secure, real-time transactions which will enhance India’s global trade competitiveness.
India ranks first in the Global Open Finance Index for its strong collaborative fintech infrastructure, advancing innovation while ensuring systemic stability. Stablecoins are an integral component of Decentralized Finance (“DeFi”), functioning as a stable medium of exchange across decentralized services having peer-to-peer transactions. DeFi enables low-cost lending, borrowing, decentralized insurance, near-instant payments without banking fees, and access to crypto-derivatives, supporting an efficient financial system. Smart contracts, rapidly adopted in BFSI, automate loan disbursal and compliance, achieving 45% faster settlements with transparency. Paired with stablecoins, they ensure constant value transfers for reliable, scalable applications. Regulated stablecoins will propel India’s fintech leadership, paving the way for DeFi and smart contracts to modernize the digital ecosystem.
Global Regulatory Framework on Stablecoins
The global stablecoin market is going to cross $400 billion in 2025 itself and nearly $2 trillion till 2028. Many developed countries, including the US, the EU and Japan, have formally recognised stablecoins and created detailed frameworks to regulate their use. Amid rapid global expansion, India must design a structured and balanced regulatory model that incorporates insights from established international regulatory practices yet tailored to its domestic financial priorities.
The US GENIUS Act requires every digital token to be backed one-to-one by real sovereign assets such as cash and US Treasuries, a framework also adopted by Polygon’s ARC. Issuers must follow the Bank Secrecy Act, implement KYC and AML controls, and maintain systems to respond to lawful orders. They must publish monthly reserve disclosures with independent attestations and provide annual audited financial statements. India should incorporate similar safeguards in its legislation to prevent crashes like the Terra Luna collapse, which wiped out billions of dollars in value.
Under the EU MiCA framework, all stablecoin issuers must obtain a license as a credit institution or e-money institution and publish a detailed white paper. MiCA classifies stablecoins into two categories: E-Money Tokens (pegged to a single fiat currency) and Asset Referenced Tokens (backed by a basket of assets). Holders have an enforceable right to redeem tokens at par value without delay or penalty. Similarly, RBI should have a comparably clear and flexible regulatory architecture.
Japan allows only banks, fund transfer service providers and trust companies to issue digital-money type stablecoins. Similarly, India should allow only RBI-regulated entities to issue stablecoins like Banks, NBFCs and regulated fintechs under a specialised license. The recent launch of the world’s first yen-pegged stablecoin by JPYC, a Japanese startup, marks a transformative change for local currency-backed stablecoins and presents a compelling case for India to analyse this development.
Policy Suggestions & Way Forward
There are more than 1200 startups in the Web 3.0 ecosystem attracting funds over $3 billion in 2024. Blockchain products have steadily gained popularity among government and private enterprises. To enhance innovation, RBI (along with Meity) should launch a regulatory sandbox for Stablecoin development similar to what they launched for CBDC to give a testing ground for the financial experimentation.
GIFT City can be a very effective place to pilot the stablecoin framework as it can act as a governance and operational testbed for tokenized financial instruments and emerging fintech models. GIFT City has established banking and settlement infrastructure, including a recently launched foreign currency settlement system (“FCSS”), which enables real-time settlement of transactions in multiple currencies similar to Japan. This robust infrastructure supports integration with stablecoin platforms for seamless global and domestic payments. However, a pilot within GIFT City may offer controlled insights, but its limited scale and specialised environment might not fully reflect India's complex financial ecosystem.
It can also be integrated to the India Stack especially with UPI, making the Digital Public Infrastructure (“DPI”) more resilient and borderless for Indians. By leveraging UPI’s universal access, seamless onboarding and zero fees, stablecoins enable instant and low-cost cross-border payments. This integration reduces reliance on foreign currencies and strengthens India’s position in the global fintech industry. This is not about bringing unregulated crypto into the system but about enabling RBI-supervised, fully backed digital rupee tokens, just as UPI already supports wallets and credit lines.
Neobanks are fully digital, branchless banks delivering financial services through mobile apps, and are projected to reach USD 394.6 billion globally by 2026. They offer instant onboarding, AI-driven credit scoring and a seamless user experience. The government may consider enabling neobanks to integrate stablecoins into their operational frameworks by relaxing regulatory constraints that currently limit their scalability. This would enable neobanks to offer far more efficient financial services, giving them a competitive edge over traditional banks, especially since differentiation and operational flexibility have been major hurdles for neobanks in India. Neobanks worldwide, like RedotPay and Deblock, have successfully adopted “stablecoin-based payment systems.” Once this fusion becomes successful, it could also pave the way for the introduction of gold-backed stablecoins.
Conclusion
CBDCs and stablecoins are not rivals; they perform distinct yet complementary functions. CBDCs can support monetary policy implementation and public-sector disbursements, while stablecoins are better suited for commercial payments. Such clarity would allow both instruments to jointly strengthen India’s payment systems and global digital-finance position.
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