CBDCs Over Stablecoins

Context:

At the annual meeting of the World Bank Group and the International Monetary Fund (IMF) in Washington, D.C., RBI Governor Sanjay Malhotra urged to central banks worldwide: promote Central Bank Digital Currencies (CBDCs) rather than stablecoins for cross‑border payments.

About CBDCs vs Stablecoins:

- A Central Bank Digital Currency (CBDC) is a digital version of a nation’s official currency, issued and backed by its central bank. It is legal tender and holds the same value as physical cash.
- Example: Digital Rupee (India), e-CNY (China), eNaira (Nigeria)
- Stablecoins are cryptocurrencies issued by private companies designed to maintain a stable value by pegging them to assets like fiat currencies (e.g., USD), commodities (e.g., gold), or using algorithmic mechanisms.

Comparison:

Feature	CBDC (e.g., India’s Digital Rupee)	Stablecoin (e.g., USDT, USDC)
Issuer	Central bank of the country.	Private entities (corporations, consortia).
Backing / Liability	Full faith and credit of the government / central bank (sovereign liability)	Backed by reserve assets (fiat, commodities, short‑term securities) or algorithmic mechanisms.
Legal Status	Legal tender (in many designs) within the issuing jurisdiction.	Not legal tender; treated as crypto asset or digital token subject to market acceptance.
Nature & Control	Centralized (or permissioned) system, controlled by the central bank.	Can be centralized (corporate) or decentralized (algorithmic/DAO‑based) depending on design.

Concerns Over Stable coins:

· Stablecoins, often pegged to assets like the US dollar, are issued by private entities, raising concerns about transparency and regulatory oversight.

· Governor Malhotra warned that widespread adoption of stablecoins could lead to the dollarization of economies, undermining national monetary policies.

· He emphasized that stablecoins could pose risks related to financial stability and capital account flows.

Benefits of CBDCs Over Stablecoins

Central Bank Digital Currencies (CBDCs) offer several advantages over stablecoins, making them an attractive option for cross-border payments and financial transactions.

Some of the key benefits of CBDCs over stablecoins:

1. Fiat Backing: CBDCs are backed by central banks, ensuring stability and trust, whereas stablecoins are often backed by commercial entities or algorithms.

2. Monetary Policy Control: CBDCs allow central banks to maintain control over monetary policy, whereas stablecoins can create risks for monetary policy and financial stability.

3. Financial Integrity: CBDCs preserve the integrity of money, reducing risks associated with money laundering and terrorist financing.

4. Security: CBDCs are more secure than stablecoins, as they are backed by central banks and utilize advanced cryptography.

5. Regulatory Oversight: CBDCs are subject to regulatory oversight, ensuring compliance with anti-money laundering (AML) and know-your-customer (KYC) requirements.

Conclusion:

Governor Sanjay Malhotra's call for central banks to promote CBDCs over stablecoins underscores India's commitment to ensuring financial sovereignty and stability in the evolving digital economy. As the global financial landscape continues to transform, the adoption of CBDCs may play a pivotal role in shaping the future of international payments and monetary systems.