RBI Advocates CBDCs as Superior Alternative to Stablecoins for Global Payments and Monetary Stability

Why in News

RBI Governor Sanjay Malhotra spoke at the annual meeting of the IMF and World Bank in Washington DC, where he called on other central banks to focus on Central Bank Digital Currencies (CBDCs) instead of stablecoins for handling payments across borders. This comes as more countries are accepting stablecoins, and it shows India's push for safer digital money options that protect national control over currency, especially when private cryptos could affect economic policies.

Key Points

1. 1. RBI Governor Sanjay Malhotra urged central banks to promote CBDCs over stablecoins, saying CBDCs are like regular money but digital, with benefits like being easy to track and secure.
2. 2. He explained that CBDCs can be tokenized, meaning they can be divided into small units for use, and they keep the full trust and value of government-backed money.
3. 3. Without other countries adopting CBDCs, the full benefits for payments between nations will not happen, as per Malhotra's statement.
4. 4. India is testing two types of CBDCs through pilot projects: one for everyday use by people (retail) and one for big transactions between banks (wholesale).
5. 5. Malhotra repeated RBI's view on cryptocurrencies, noting they can harm how countries control money flow, allow illegal movement of funds, and lead to money washing.
6. 6. Finance Minister Nirmala Sitharaman recently said at a meeting in Delhi that countries must adapt to new ideas like stablecoins to avoid being left behind in global money changes.
7. 7. Stablecoins are private digital coins tied to real assets like the US dollar, and they are growing fast, with laws supporting them in places like the US, South Korea, and Hong Kong.
8. 8. Top stablecoins like Tether and USDC make up about 90% of the global stablecoin market, which is worth around $285 billion.
9. 9. RBI warns that using US dollar-tied stablecoins a lot could lead to "dollarisation" in India, where the dollar takes over from the rupee, making it hard for RBI to manage the economy.
10. 10. US officials see stablecoins as a way to make the dollar stronger worldwide and lower costs for government borrowing.
11. 11. On India's economy, Malhotra called growth "phenomenal," with RBI forecasting 6.8% for the year ending March 2026, and possible higher growth if US tariffs on Indian goods are sorted out.
12. 12. India's growth in the first three months was 7.8%, leading IMF and World Bank to raise their forecasts for this year to 6.5-6.6%, but lower next year's to 6.2-6.3% due to trade issues.
13. 13. The article includes a photo of Governor Malhotra from a policy event, showing him in a formal setting to highlight his role in sharing RBI's views on economic matters. This image helps show how RBI leaders communicate important policies to the public and world.

Explained

What are Central Bank Digital Currencies (CBDCs) and why is RBI promoting them over stablecoins?

- Basic Concept of CBDC: CBDCs are digital forms of a country's regular money, issued and backed by the central bank, like RBI in India, making them safe and equal to cash or bank notes in value.

- Advantages Over Stablecoins: Unlike stablecoins, which are made by private companies and tied to assets like the US dollar, CBDCs keep full government control, prevent risks like sudden value drops, and ensure money stays within national rules.

- RBI's Pilot Projects: India is testing retail CBDC for daily payments by people and wholesale for bank dealings, showing how it can work without changing the strong payment systems like UPI already in place.

- Global Need for Adoption: For payments across countries, like sending money home from abroad, CBDCs need many nations to use them together to make transfers faster and cheaper than current methods.

How do stablecoins work and what risks do they pose according to RBI?

- Definition and Function: Stablecoins are cryptocurrencies designed to hold a steady value by linking to real things like the US dollar, gold, or other assets, making them useful for trading or payments without big price swings.

- Global Growth and Examples: Coins like Tether and USDC dominate the $285 billion market, with new laws in the US (GENIUS Act), South Korea, and Hong Kong allowing companies to issue them tied to local money.

- Risks for India: RBI worries about "dollarisation," where people prefer US dollar stablecoins over the rupee, weakening RBI's ability to control inflation or interest rates, and increasing chances of illegal fund moves.

- Broader Impacts: They could help money laundering or bypass capital rules, which control how money enters or leaves a country, affecting economic stability.

What is the background of India's stance on cryptocurrencies and digital payments?

- Evolution of RBI's Policy: RBI has been cautious since 2018, banning banks from dealing with cryptos at one point, but now focuses on regulating them to protect users while testing CBDCs under the RBI Act of 1934.

- Role in Digital Economy: India has a strong system with UPI handling billions of transactions monthly, so CBDCs are more for international use, aligning with goals like Digital India to make finance inclusive and tech-based.

- Government Support: Finance Minister's recent comments show India wants to join global changes but safely, through committees studying cryptos and taxes like 1% TDS on trades introduced in 2022.

- International Context: This fits with G20 talks on crypto rules, where India pushes for worldwide standards to handle risks like those seen in crypto crashes.

How does this relate to India's economic growth and global trade challenges?

- Current Growth Trends: India's economy grew 7.8% in the first quarter, driven by domestic spending and investment, with RBI forecasting 6.8% for the full year, higher than many countries.

- Impact of US Tariffs: Tariffs of 50% on Indian goods could slow exports, but ongoing talks might resolve this, adding upside to growth, as India is less dependent on exports than others.

- Role of Policies Like GST: Changes in GST rates can help balance trade issues, showing how fiscal tools support RBI's monetary work for steady growth around 7%.

- Macroeconomic Strength: With low inflation at 1.5% and strong fundamentals, India can handle global uncertainties, as noted by Malhotra, aiding long-term goals like becoming a developed nation by 2047.

MCQ Facts

Mains Question