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What are Stablecoins and How are They Used in India?

What are Stablecoins and How are They Used in India?

Summary

Stablecoins are digital currencies that are attached to reserve assets like national currency, gold, government securities, etc. Being blockchain-based, stablecoins maintain the digital currency benefits while minimizing the notorious crypto volatility. Stablecoins can be currency-backed, commodity-backed, crypto-backed, or in algorithmic forms. India is planning to launch its stablecoin, ARC, which will ride on the Reserve Bank of India’s (RBI’s) Central Bank Digital Currency (CBDC) ecosystem.

Stablecoins are digital currencies that are linked to a reserve asset, thus reducing price volatility while retaining blockchain efficiency.

Popular cryptocurrency, Bitcoin, has an annualized volatility of more than 40%. Fluctuating purely on the balance of supply and demand, this decentralized currency is known for its volatility. Cryptocurrency can shed this volatility if a reserve asset is attached to it.

Stablecoins do exactly that by maintaining a link to a reserve asset. Such a reserve asset can be fiat currencies, commodities or financial instruments.

What is Stablecoin?

Stablecoin is a highly practical innovation in the digital asset ecosystem. Its link to a reserve asset ensures that it maintains a relatively stable value. Stablecoin meaning is ingrained in two key words: “price stability”.

Stablecoin price may be pegged to underlying assets such as

  • US Dollar
  • Euro
  • Gold
  • Government securities
  • Other cryptocurrencies, etc.

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What is a stablecoin development company?

A stablecoin development company develops digital currencies that can be pegged to a reserve asset. They ensure that the stablecoin is customized, secure and updated with the regulations. A stablecoin development company manages the end-to-end infrastructure of the stablecoin, which includes

  • Smart contract creation
  • Liquidity planning
  • Reserve management, and
  • Multi-chain deployment

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Why was a stablecoin developed?

Traditional cryptocurrencies have been struggling to maintain stability and have experienced extreme short-term volatility. Stablecoins were introduced primarily to address this challenge.

  • Stablecoins reduce exposure to market fluctuations.
  • It allows blockchain-based transactions.
  • It supports Decentralized Finance (DeFi) applications.
  • It enables faster cross-border remittances.
  • It adds liquidity to the crypto market.

What are the different types of stablecoins?

The table below explains the different types of stablecoins, with examples.

TypeFeatureExample
Fiat-collateralized stablecoinsThey maintain reserves of fiat currenciesUSDT (Tether), FDUSD (First Digital USD)
Commodity-backed stablecoinsThey track the value of physical assetsPAG (PAX Gold), KAG (Kinesis Silver)
Crypto-collateralized stablecoinsThey track the value of cryptocurrenciesDAI (Ethereum blockchain-based stablecoin)
Algorithmic stablecoinsPrice stability is maintained through algorithms and supply adjustmentsFRAX (backed fractionally by algorithm and collaterals)

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Which are the most popular stablecoins in the world?

A list of stablecoins that are among the most popular in the world as of now is provided below:

StablecoinPegged AssetCategoryPrimary Use
USDT (Tether)US DollarFiat-backedTrading and payments
USDCUS DollarFiat-backedInstitutional and retail transactions
DAIUS DollarCrypto-backedDecentralized finance
FDUSDUS DollarFiat-backedExchange settlements
PAX Gold (PAXG)GoldCommodity-backedGold exposure through blockchain

The table also indicates the specific transactional or investment usage of stablecoins.

Also, read – What is CAGR in mutual funds?

Where does India stand in stablecoin use and development?

The RBI- was quick to announce the launch of its digital currency, CBDC-. However, it has maintained a cautious approach towards stablecoins. However, the Asset Reserve Certificate (ARC) is tipped to be India’s very own stablecoin.

Here are a few basic details on ARC:

  • ARC will track the value of the Indian National Rupee.
  • It will be collateralized 1:1 against cash and cash equivalents such as government securities and treasury bills.
  • WazirX, Polygon and fintech firm Anq are involved in the design and development of the ARC.
  • ARC will have a two-tier framework. The CBDC will handle final settlements, while ARC will provide a layer for programmable payments, smart contracts, and decentralized finance.
  • ARC will be expected to curb the outflow of domestic liquidity to USD-backed stablecoins.
  • ARC will initially be rolled out to meet the needs of corporate and institutional accounts.

Like elsewhere, a stablecoin in India is expected to be used for international remittances and business payments, merchant settlements, treasury management, digital asset trading, etc.

Also, read – Types of mutual funds in India

Final word

Stablecoins are a significant development in the blockchain-based financial ecosystem. Stablecoins provide the efficiency of digital assets with the stability of traditional currencies. In India, blockchain adoption is at a nascent stage, and regulatory clarity is a work in progress. Nevertheless, it is an area that Indian investors and businesses need to keep a close watch on. 

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FAQs

Can stablecoins be bought using Indian Rupees (INR)?

Yes. You can buy stablecoins through cryptocurrency exchanges that support the Indian rupee. You will need to ensure KYC verification, account funding through banking channels, and then place the order for the desired stablecoin.

How does a stablecoin comply with regulations?

The issuer that creates a stablecoin generally needs to fulfill legal frameworks and ensure that reserve management systems, smart contract infrastructure, audit mechanisms, and compliance processes, such as Anti-Money Laundering (AML) and Know-Your-Customer (KYC) requirements, are in place.

How many stablecoins are in circulation in the global cryptocurrency ecosystem?

While there are more than 200 stablecoins in circulation across the world, a small minority forms the majority of the market value and trading volume. The exact number keeps changing as new stablecoins are launched, while some become inactive.

Why are businesses using stablecoins?

Stablecoins are helping businesses to streamline cross-border payments, reduce currency conversion costs, improve treasury management, and settle transactions with more speed and accuracy.

Can I invest in stablecoins and earn returns?

Yes, you can earn returns from stablecoins. You can lend stablecoins, participate in liquidity pools, or use staking and yield-generating protocols. The returns may bear inherent risk and would vary with market conditions and platform policies.
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