Stablecoins: Tread with caution | Photo Credit: Funtap

Among the many irrational actions of the Trump administration, his actions on cryptos have been particularly disruptive. Even as global policy makers were coming to terms with crypto assets, stablecoins, central bank digital currencies et al, and were on the verge of forging a global consensus on regulating cryptos, the Trump administration upset all these plans.

It issued a Presidential order in January which made some pretty whacky suggestions. The first was to create a reserve made from crypto assets such as bitcoins, seized through law enforcement actions. The second, to prohibit central bank digital currencies. Third, to promote the development and growth of US dollar backed stablecoins globally. Fourth, to stop all the ongoing work on creating a global regulatory framework for cryptos.

These changes were projected as a break from the stifling rules that throttle innovation. But the freedom being given through these rules take crypto regulations back by 10 years, when millions of dollars were lost by investors in unregulated crypto exchanges and these assets were the preferred conduit for cross-border money transfer for illicit activities.

The US government has since then begun public consultations on setting up the strategic crypto asset reserve, issued the draft the CLARITY Act to frame regulations for crypto assets and GENIUS Act for promoting stablecoins.

All countries are watching the US actions closely. Some are wondering if they should scrap their CBDC projects and begin focusing on issuing stablecoins like the US. That will, however, be a bad idea. CBDCs are the future of fiat currency.

Private stablecoins, the kind that Trump is proposing, can have limited use in India. But on the other hand, they will create multiple problems for regulators. They carry all the risks which privately owned crypto assets such as bitcoins carry – default risk, money laundering risk, systemic liquidity risk and capital controls risk.

CBDCs versus stablecoins

For those not familiar with this jargon, CBDC is a digital form of the country’s fiat currency. It is issued by the central bank and has sovereign guarantee, like physical notes. This makes it ideal as legal tender, that is, for use in buying or selling goods and services. Since it is maintained by the central bank, it does not threaten system liquidity, is under adequate surveillance and does not pose a problem to the currency value.

Stablecoins are privately issued digital assets, with a stable asset such as the US dollar as the underlying. Stablecoins are better than other cryptocurrencies such as bitcoin because they are backed by assets, which can be liquidated to repay the user in case of default by the issuer. But they are no match for CBDCs in credibility or integrity.

It is moot if stablecoins can become popular as legal tender. But the main challenge is that their use in cross-border payments can be misused for nefarious activities such as money laundering, terror financing, drug trafficking etc since they are not under any official supervision. With the central bank not having control on the issuance of stablecoins, they can create imbalance in system liquidity and impair the external account.

The GENIUS Act of the Trump administration is proposing that US dollar backed stablecoins should be issued by entities permitted by the government such as a subsidiary of an insured depository institution, a federal-qualified non-bank payment stablecoin issuer, or a state-qualified payment stablecoin issuer. Even if the issuance is limited to a few entities, they still carry higher default risk. The GENIUS Act is proposing that the stablecoin issuers will come under anti money-laundering Act and will be subject to regular audits. But monitoring the end use of these assets will continue to be a challenge.

Also, the central bank is unlikely to dictate the quantum of stablecoin issuances, which can cause liquidity management problems. Unbridled issuances of stablecoins can also weaken the currency.

Why is US promoting stablecoins

The GENIUS Act appears to be Trump’s brainchild. As he has claimed on social media, “Nobody will do it better, it is pure GENIUS! Digital Assets are the future, and our Nation is going to own it. We are talking about MASSIVE Investment, and Big Innovation. The House will hopefully move LIGHTNING FAST and pass a ‘clean’ GENIUS Act… This is American Brilliance at its best, and we are going to show the World how to WIN with Digital Assets like never before!”

Trump is ostentatiously hoping that both US and foreign companies will issue stablecoins, thus increasing demand for dollars. But besides this, some personal interest also appears to be at stake behind Trump’s push for stablecoins.

A recent report from Financial Times pointed out that Trump and his family have earned profit of more than $1 billion in their crypto ventures. World Liberty Financial, promoted by Trump’s sons, Donald Trump Jr. and Eric Trump operates USD1 stablecoin, which has a market capitalisation of about $2.6 billion. This is the sixth biggest stablecoin globally.

Should India follow the US?

Given these complex motives, there is no reason why India should follow in US’ footsteps to launch rupee backed stablecoins. The vibrant UPI backed domestic payment system is thriving in the country, making both stablecoins and CBDCs redundant for domestic payments, for now.

The Trump administration appears to be hopeful that all other countries will drop their CBDC projects and embrace dollar backed stablecoins for international payments in the future. But given the ongoing push-back against the dollar this appears highly unlikely.

According to Atlantic Council’s CBDC tracker, projects for evaluating the use of CBDCs in global trade settlement have more than doubled in recent times.

Once other trade partners of India are ready with their CBDCs, India could begin settling bilateral trade in local currencies. With the global South, led by BRICS attempting to reduce reliance on the dollar and dollar-backed settlement systems, use of dollar stablecoins is unlikely to see any traction in global trade settlements. India must therefore ignore the noise over stablecoins and GENIUS Act for now and concentrate on developing the CBDC, especially for international payments.

Published on October 23, 2025