Stablecoin Regulation in India: Need, Benefits & Current Legal Framework Explained

Relevance: GS III Economics

Stablecoins, a kind of cryptocurrency based on fiat currencies like the US dollar or the Indian rupee, have become increasingly popular as the world’s adoption of digital assets picks up speed. The regulatory environment surrounding stablecoins in India is still developing, which has sparked an important discussion about financial stability, cryptocurrency regulation, RBI supervision, and risk mitigation for digital currencies. 

India to Introduce Regulatory Framework for Stablecoins

A stablecoin regulatory framework will be established by the Act.One kind of cryptocurrency that has a value tied to another money, commodity, or financial instrument is called a stablecoin. Tether (USDT), for instance, is based on the US dollar.

• They have the ability to make payments more efficient.

What has caused the rise in Stablecoin usage?

They can maintain a more stable value because they are linked to an underlying asset, which makes them a more dependable medium of exchange than other erratic cryptocurrencies like bitcoins.

• Unlike many unbacked crypto assets, underlying assets are backed by a recognizable issuer.
• Banks, nonbank financial institutions, and major technology corporations may be issuers.
• A governance authority typically makes decisions on stablecoin arrangements.

India’s Cryptocurrency and Crypto Asset Regulation

In India, cryptocurrency assets are currently uncontrolled. Nonetheless, the government introduced a comprehensive taxation structure for the transfer of virtual digital assets (VDAs) in the Finance Act, 2022.

• The Income Tax Act of 1961 defines a VDA as any information, code, number, or token that is created using cryptography or another method and that is transferred, stored, or exchanged electronically. 
• It also levied a 30% tax on capital gains from VDAs. For instance, non-fungible tokens (NFT), cryptocurrencies, etc. The Prevention of and Money-laundering Act, 2002, began to apply to VDAs in 2023.

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What is the mechanism of cryptocurrency? 

It is predicated on the idea of a blockchain, which is a distributed public ledger. 

• A public ledger is a record of every transaction that currency holders have updated.
• It is produced by a procedure known as mining.

In mining, complex mathematical problems are solved using computer power to produce currency. Additionally, users can purchase the currencies from brokers and use cryptographic wallets to store and spend them.

Mains:

Question: While stablecoins offer efficiency in payments, they also raise concerns about regulatory arbitrage and financial oversight. In this context, critically evaluate the need for a regulatory framework for stablecoins in India.

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Mains PYQs:

Question: What is Cryptocurrency? How does it affect global society? Has it been affecting Indian society also? (UPSC IAS 2019)

MCQs

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Question: Consider the following statements regarding Stablecoins:

1. Stablecoins are cryptocurrencies whose value is backed by physical commodities only, such as gold or oil.
2. Tether (USDT) is a stablecoin pegged to the US Dollar.
3. Stablecoins are known to reduce the volatility usually associated with cryptocurrencies like Bitcoin.

Which of the statements given above is/are correct?

1. 1 and 2 only
2. 2 and 3 only
3. 1 and 3 only
4. 1, 2 and 3

Answer: B. 2 and 3 only

MCQ PYQs

Question: Consider the following pairs: (2018)

Terms sometimes seen in news

1. Belle II experiment — Artificial Intelligence
2. Blockchain technology — Digital/ Cryptocurrency
3. CRISPR – Cas9 — Particle Physics

Which of the pairs given above is/are correctly matched?

1. 1 and 3 only
2. 2 only
3. 2 and 3 only
4. 1, 2 and 3

Answer : B

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