Stablecoins, CBDCs, and India’s Evolving Monetary Architecture -

UPSC Relevance–

prelims-Keywords: Stablecoins, CBDC, Cryptocurrency Regulation, Digital Payments, Monetary Sovereignty, Fintech Innovation, Global Capital Flows

Mains-GS Paper 3: Economics, Banking, Monetary Policy, Financial Technology

Why in the News?

Union Finance Minister Nirmala Sitharaman, in her address at the Kautilya Economic Conclave 2025, highlighted the transformative impact of stablecoins and cryptocurrency innovations on global finance.

She stated that countries must adapt to new monetary architectures or risk exclusion, hinting at a possible shift in India’s cryptocurrency policy and emphasising the role of CBDCs (Central Bank Digital Currencies) in maintaining financial sovereignty.

Background: Crypto Innovations and Global Monetary Transformation

Stablecoins: Cryptocurrencies pegged to stable assets like fiat currencies or gold.
- Example: USDT (Tether), USDC, DAI.
- Aim: Reduce volatility, enabling digital payments and cross-border transactions.
Private cryptocurrencies: Highly volatile, lacking legal tender status; currently not legalised in India, but transactions are taxed.
CBDCs: Government-issued digital currencies with legal backing, piloted by RBI to modernise payments and maintain monetary control.

The global financial system is undergoing systemic transformation, making adaptation necessary for nations to retain economic influence.

Scale of Transformation

1. Binary Choices for Nations

Countries face two options:
- Adapt to new monetary architectures like stablecoins and digital assets, or
- Risk exclusion from evolving global financial networks.

Non-adaptation may reduce influence in capital flows, trade finance, and cross-border payments.

2. Global Context

Financial innovations are reshaping the landscape of money, including traditional banking and capital allocation.
Strategic rivalries, wars, and evolving coalitions are testing old alliances and creating opportunities for new partnerships.

Example: Countries integrating digital payments and stablecoins are able to facilitate faster remittances and cross-border trade, gaining an edge over non-adopters.

India’s Current Approach

1. Private Cryptocurrencies / Virtual Digital Assets (VDAs)

Not legalised, but transactions are taxed.
RBI has advocated for restrictions or bans due to volatility, fraud risks, and money-laundering concerns.

2. Central Bank Digital Currency (CBDC)

Issued and regulated by RBI, fully legal tender.
Pilot projects underway to:
- Modernise digital payments,
- Reduce dependency on cash, and
- Ensure monetary control in the face of private crypto growth.

3. Economic Leverage and Resilience

India has a strong capacity to absorb external shocks.
Financial and geopolitical vigilance is required to maintain strategic independence.

Sitharaman’s words: “Eternal performance is the price of strategic independence.

Challenges

Regulatory Uncertainty:
Private stablecoins and cryptocurrencies lack a clear legal framework, creating risks for investors and financial stability.
Financial Sovereignty Risk:
Widespread adoption of private stablecoins could undermine national currency control.
Global Competition:
Nations not engaging with digital assets may face exclusion from cross-border digital financial systems.

Way Forward for India

Balanced Policy Approach:
Regulate private cryptocurrencies without stifling innovation.
Promote CBDC adoption to retain monetary sovereignty.
Strategic Engagement with Stablecoins:
Explore frameworks to monitor, integrate, or collaborate with global stablecoin initiatives.
Strengthen Economic Resilience:
Combine financial vigilance, regulatory clarity, and strategic planning to navigate global monetary shifts.
Public Awareness and Innovation:
Encourage digital literacy on cryptocurrencies.
Support fintech innovation under regulated and secure frameworks.

Conclusion

India stands at the crossroads of monetary transformation:

Innovations like stablecoins are redefining capital flows globally.
CBDCs provide legal certainty and help maintain national control.
To safeguard economic sovereignty, India must adopt a balanced policy, integrating innovation with regulation and ensuring strategic vigilance in a rapidly changing financial landscape.

The Finance Minister’s message is clear: India must engage proactively, stay resilient, and leverage emerging monetary architectures to strengthen its global economic influence.

UPSC Prelims Practice Questions

Q1.Consider the following statements about CBDCs (Central Bank Digital Currencies):

They are digital currencies issued by the central bank of a country.
They have the same legal status as the country’s fiat currency.
They are primarily issued by private corporations to facilitate cross-border payments.
RBI is currently piloting a CBDC in India.

Which of the statements given above are correct?
(A) 1, 2 and 4 only
(B) 1 and 3 only
(C) 2 and 3 only
(D) 1, 2, 3 and 4

Answer: (A)
Explanation:

(1) Issued by central banks, not private corporations.
(2) Legal tender, same as fiat currency.
(3) Private corporations do not issue CBDCs; they may issue private cryptocurrencies.
(4) RBI is piloting a CBDC in India.

Q2.Stablecoins are:

(A) Cryptocurrencies pegged to a stable asset to maintain price stability
(B) Government-backed legal tender currencies
(C) Highly volatile cryptocurrencies like Bitcoin
(D) Central Bank Digital Currencies

Answer: (A)
Explanation: Stablecoins are pegged to assets like fiat currency or gold to reduce volatility and facilitate digital payments.

Q3.Which of the following are true regarding India’s current cryptocurrency policy?

Private cryptocurrencies are fully legalised in India.
Transactions involving virtual digital assets (VDAs) are taxed.
RBI advocates for banning private cryptocurrencies while piloting its own CBDC.

Select the correct answer:
(A) 1 and 2 only
(B) 2 and 3 only
(C) 1 and 3 only
(D) 1, 2 and 3

Answer: (B)
Explanation:

(1) Private cryptocurrencies are not legalised in India.
(2) Transactions are taxed.
(3) RBI promotes CBDC while cautioning against private cryptocurrencies.

Q4.Union Finance Minister Nirmala Sitharaman warned that nations must:

(A) Ban all private cryptocurrencies immediately
(B) Adapt to new monetary architectures like stablecoins or risk exclusion
(C) Replace fiat currency with stablecoins
(D) Maintain complete isolation from global crypto trends

Answer: (B)
Explanation: Nations must engage with innovations like stablecoins to avoid being excluded from global financial systems.

Q5.Which of the following statements correctly describes RBI’s Central Bank Digital Currency (CBDC)?

It is government-backed and legal tender.
It can help reduce dependency on cash.
It is issued by private fintech companies.