Can Stablecoins Drain Wealth From Emerging Economies? Deputy Governor Sounds Alarm

Despite the rapid proliferation of stablecoins, many regulators are apprehensive about adopting the technology, particularly in emerging economies.

What Happened:"Unbacked cryptocurrencies — we don't believe are anything that answers to anything, which is a financial asset or even a commodity," Reserve Bank of India (RBI) Deputy Governor T. Rabi Sankar said at a recent Moneycontrol event in Bengaluru.

Stablecoins like Tether USDT/USD and USD Coin USDC/USD crypto assets, backed by other currencies, may not be a risk for countries whose currency is pegged to them, Sankar explained. However, for emerging market economies, they could present a Pandora's box of risks.

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Sankar also highlighted the potential economic fallout of allowing stablecoins linked to foreign currencies in emerging markets. Such a move could trigger a continuous outflow of wealth from emerging economies to developed ones, as the income currently earned by the government would be redirected to private entities in developed economies, he says.

Sankar's Solution: Each country should have its own Central Bank Digital Currency (CBDC) and establish a mechanism for these CBDCs to interface and transact with each other, Sankar advises.

CBDCs are being used as a policy instrument in several jurisdictions, but the RBI currently has no plans to do so.

Sankar emphasized the need for a more efficient global transaction system, adding that cross-border transactions are the biggest emerging use case at the moment. The current global payment system has too many inefficiencies, he adds, citing high costs associated with small-value cross-border remittances.

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