The rise of stablecoins in 2025 has brought new challenges and opportunities to the global financial system. These digital currencies are usually privately issued and linked to a country’s legal tender. Their growing use affects currency competition, financial stability, and payment systems worldwide. This article explores the implications of stablecoins and the historical context of currency competition.
What Are Stablecoins?
Stablecoins are digital currencies tied to a stable asset, often a national currency like the US dollar. They offer quick and low-cost cross-border payments. Unlike cryptocurrencies such as Bitcoin, stablecoins aim to reduce volatility. Many are privately issued but backed by legal tender reserves or equivalent assets.
Positive Effects of Stablecoins
Stablecoins can lower remittance costs and speed up transactions. They provide access to stable means of payment in countries with weak governance or unstable currencies. This can improve financial inclusion by offering citizens a reliable store of value and medium of exchange.
Risks and Challenges
Stablecoins pose risks to financial stability. They may increase dollarisation, undermine national currencies, and hollow out traditional banking. The privatization of seigniorage—profits from issuing currency—could weaken public finances. They also raise concerns about money laundering and regulatory oversight. Currency competition may intensify, leading to instability in exchange rates.
Historical Context of Currency Competition
The state monopoly on currency issuance is relatively recent, about 175 years old. Before this, private money issuance was common and profitable. In British India, the East India Company issued its own silver rupee to unify diverse local coins. However, fluctuations in gold and silver prices caused instability. Small payments became difficult due to high denomination coins, leading to continued currency diversity despite efforts to unify.
Modern Currency Competition and Stablecoins
Stablecoins mainly compete with currencies not linked to the US dollar. The dollar itself may be linked to stablecoins, reinforcing its dominance. China has banned stablecoins domestically but may use offshore yuan linked to stablecoins. Trust remains a key factor in currency acceptance. India currently does not recognise stablecoins but faces pressure to reconsider amid global trends.
Future Outlook
The impact of stablecoins on global finance is uncertain but . They may reshape currency networks, influence sanctions enforcement, and alter financial power balances. Countries must weigh the benefits of innovation against risks to sovereignty and stability. The evolving landscape demands careful policy responses.
Questions for UPSC:
- Point out the economic and social impacts of dollarisation in emerging economies with suitable examples.
- Underlined the challenges faced by the Reserve Bank of India in maintaining currency stability during the British colonial period and post-independence.
- Critically analyse the role of digital currencies in enhancing financial inclusion and the associated risks.
- Estimate the implications of currency competition on national sovereignty and fiscal policy in a globalised financial system.
