While stablecoins linked to underlying currencies are more feasible than private assets and offer an alternative to CBDC (central bank digital currency), they are only beneficial to certain economies to which they are linked, according to RBI Deputy Governor T Rabi Sankar.
Stablecoins provide an international benefit, especially to linked economies such as US and Europe but are not necessarily good for countries like India owing to the transfer of seigniorage to private issuers to the extent that it replaces the use of the rupee in the economy.
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“That is one aspect we have to take into account. What happens to India’s capital regulations or monetary policy. If large stablecoins are linked to some other currency, there is a risk of dollarisation,” Sankar said at an event organised by IBA.
“We have to be very careful about allowing these sorts of instruments. Stablecoins can provide some of this but they are only useful to a few countries that are linked. From the past experience in other countries, it is an existential threat to policy sovereignty,” he said.
A stable solution then is for every country to have its own CBDC and for countries to then create a mechanism where the CBDCs can interface and transact with each other, he said, adding that while CBDC is being used a policy instrument in several jurisdictions, the RBI has no plan to do so.
On the use cases of CBDC, Sankar said the same is required for global transactions if nothing else, adding that cross-border transactions are the biggest emerging use case at the moment.
“The current global payment system… the corresponding banking arrangement that exists has features that add inefficiencies,” he said.
This is because there are only a few entities that all transactions are routed through, which translates to higher costs for even small value cross-border remittances, and thus the system needs to be diversified.
“As per World Bank estimates, a cross-border small value transaction, remittance transaction is at 6 per cent. That’s extremely high.”
Urging banks to relook their remittance structure, Sankar said that given the technology and innovation available today, banks can no longer justify the high foreign exchange margins and remittance charges.