Syllabus:

GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment. 

Context:

Reserve Bank of India (RBI) Governor urged all central banks and jurisdictions for CBDC collaboration instead of stablecoins to boost cross-border payments. Central Bank Digital Currencies (CBDCs) 

• CBDCs are government-issued digital currencies that mirror the value of a country's fiat currency and are aimed at enhancing financial inclusion and reducing transaction costs.
• Unlike cryptocurrencies, CBDCs are centrally regulated, ensuring stability and security while complementing existing financial systems instead of replacing them.

Types of CBDCs: 

• Wholesale: used primarily by financial institutions for interbank transfers.
• Retail: which are accessible to the general public for everyday transactions. 

Objectives:

• Enhancing Privacy and Security: CBDCs provide secure, private, and convenient digital payments with safeguards against fraud and identity theft, promoting trust in digital finance.
• Cutting Transaction Costs: They streamline clearing and settlement, lowering system and cross-border transfer costs, and offering affordable alternatives to costly remittance channels.
• Ensuring Stability: CBDCs reduce risks from volatile private cryptocurrencies, ensuring stability and consumer protection through a regulated, central bank–backed system.

Benefits of the CBDCs: 

• Faster transactions: CBDCs can make payments more efficient and potentially happen instantly, including cross-border transactions, by reducing intermediaries. 
• Reduced dollarization: In some economies, a well-designed CBDC can help reduce the public's reliance on foreign currencies or private cryptocurrencies. 
• Reduced risk: A CBDC is a direct liability of the central bank, making it as safe as physical cash and more stable than private cryptocurrencies. 

Stablecoins 

• Stablecoins are cryptocurrencies pegged to fiat currencies, commodities, or financial instruments, designed to provide a less volatile alternative to traditional cryptocurrencies. 

Rising Acceptance: 

• USA’s GENIUS(Guiding and Establishing National Innovation for U.S. Stablecoins) Act: It is United States federal law that aims to create a comprehensive regulatory framework for stablecoins. first-ever federal framework for regulating payment stablecoins. 
• South Korea’s Digital Asset Basic Act: It aims to regulate stablecoins and enhance oversight in the cryptocurrency industry, requiring stablecoin issuers to maintain a minimum capital of 500 million won. 
• EU’s MiCA (Markets in Crypto-Assets Regulation): It classifies stablecoins as Asset-Referenced Tokens (ARTs) or E-Money Tokens (EMTs) requiring issuers to hold full reserves, undergo regular audits, and comply with AML/KYC.

Concerns and Risks:

• Reinforce Dollar supremacy: At present, Tether and USDC are the top two stablecoins globally. Both are pegged to the US dollar and make up around 90 per cent of the $285 billion global stablecoin market.
• Dollarisation of the Indian economy: Increasingly acceptable of US dollar–linked cryptocurrencies could substitute the rupee leading to reduction in effectiveness of domestic policies since government or the RBI cannot control the supply of the US dollar. 
• Operational Risks: This includes cybersecurity threats like hacking of the stablecoin issuer's infrastructure, which could lead to a loss of funds or unauthorized token minting.

Patchwork Regulation: The regulatory landscape for stablecoins is still developing, with different countries having different approaches and often unclear requirements.

Sources:
Indian Express
Central Banking
Investopedia
Investopedia