Mumbai, Dec 31 (PTI) The Reserve Bank of India on Wednesday said widespread adoption of stablecoins could pose significant risks to India's monetary sovereignty and financial stability.

Stablecoins can create important financial stability risks because of their inherent vulnerabilities, the central bank said in 'Special Feature' in its bi-annual financial stability report.

"Trust in money is the foundation for maintaining financial stability," it said.

Stablecoins have emerged as a key component of the crypto asset ecosystem, and their prominence has risen following legal and regulatory clarity in select jurisdictions.

Widespread adoption of foreign currency denominated stablecoins can cause erosion of monetary control and weaken the transmission channels of domestic monetary policy, the RBI said.

As stablecoins position as an alternative form of money, it is vital to recognise that they fall short of the foundational requirements expected from a sound monetary system -- singleness, elasticity and integrity, it said.

"The RBI maintains a cautious stance on crypto assets, including stablecoins, prioritising sovereign digital infrastructure to safeguard monetary sovereignty amid global shifts and preserve financial stability," the central bank said.

It further said that central bank money is what preserves the integrity of the financial system.

"It must remain the ultimate settlement asset, and it should remain the anchor for trust in money," the RBI said.

Central bank digital currencies (CBDCs) can achieve the benefits that stablecoins claim to offer, -- efficiency, programmability, and instant settlement, but with the credibility and safety of central bank money.

"The RBI, therefore, strongly advocates that countries should prioritise central bank digital currencies (CBDCs) over privately issued stablecoins to maintain trust in money, preserve financial stability and design next generation payments infrastructure that is faster, cheaper and secure," the apex bank added.

Currently, the RBI said risks from stablecoins to macrofinancial stability outweigh their purported benefits. In their short history, stablecoins have proven to be volatile and vulnerable to confidence shocks and structural fragilities.

Wider adoption of stablecoins can introduce new channels of financial stability risks, particularly during periods of market stress.

To mitigate risks posed by their rapid growth, it is vital that jurisdictions carefully assess the attendant risks and determine policy responses appropriate to its financial system, the RBI said.

The RBI cautioned that stablecoins can circumvent controls on capital movement and complicate macroeconomic management for the central bank.

This is especially important for emerging economies like India where capital flow management frameworks (CFM) play a key role in preserving external sector stability, it added.

It further said stablecoins, like other crypto assets, can be used to bypass the current system for transferring foreign exchange in and out of the country, impeding the effectiveness of CFMs, which aim to maintain macroeconomic stability, safeguard foreign exchange reserves, and manage the risks associated with sudden and volatile capital flows.

The RBI also emphasised that without adequate regulation, stablecoins, like other crypto assets -- can be exploited for serious crimes, including money laundering, terrorism financing, and the financing of weapons proliferation.

It also noted that one of the drivers of stablecoin growth could be the emergence of legal/regulatory frameworks across major jurisdictions between 2023 and 2025, including the US, the European Union, Singapore, Hong Kong, and Japan.

In the short history of stablecoins, there have been multiple episodes, such as the May 2022 collapse of TerraUSD and the March 2023 US banking turmoil, wherein they saw significant price volatility. PTI NKD CS TRB

Stablecoins threaten monetary sovereignty and financial stability; CBDCs are urged as the safer payments alternative. Widespread adoption of privately issued or foreign-currency stablecoins can undermine monetary sovereignty, weaken monetary policy transmission, and introduce financial stability risks through price volatility and confidence shocks. Stablecoins may also circumvent capital flow management and foreign exchange transfer controls, complicating macroeconomic management and exposing the system to money laundering and terrorism financing risks. The central bank advocates prioritising central bank digital currencies (CBDCs) to deliver efficiency and instant settlement while preserving the safety and settlement finality of central bank money.