India’s debt-backed stablecoin challenge to US dollar dominance explained
Anndy Lian
India’s debt-backed stablecoin challenge to US dollar dominance explained
As governments worldwide debate the merits and dangers of digital currencies, India appears poised to launch its own state-backed stablecoin that uses government debt as collateral.Proponents argue that the Asset Reserve Certificate (ARC) could hasten the global drive towards de-dollarisation, lower India’s borrowing costs and create a “virtuous cycle” for public funding by diversifying the country’s investor base.
By tying the token to sovereign debt, developers aim to create a transparent system that complements the central bank’s monetary framework and limits outflows of local liquidity into dollar-backed cryptocurrencies.The ARC, under development by international blockchain giant Polygon and India-based fintech Anq, would function as a stablecoin: a cryptocurrency engineered to maintain a steady value, avoiding the volatility that plagues speculative digital assets like bitcoin.Every unit of the regulated digital token would be backed one-to-one by Indian government securities or treasury bills – debt instruments issued by the state to finance public spending – maintaining a steady value pegged to the rupee while operating on private blockchain infrastructure.
Its backers say that by tying the digital token directly to sovereign debt, India could keep local liquidity at home instead of letting it leak offshore.
“Success could establish India as the template for upholding private blockchain innovation while maintaining financial sovereignty,” Benjamin Grolimund, general manager of cryptocurrency exchange Flipster, told This Week in Asia.
ARC could enable “significant crypto market capture” for the world’s most populous nation, he said. “India’s move asserts the trend towards de-dollarisation as other [Asia-Pacific] hubs advance their own currency-backed stablecoin frameworks”.
‘Legal limbo’India, home to one of the world’s largest crypto user bases, has seen surging adoption among both its vast diaspora and a young, digitally native population.
Digital currencies are helping to meet the diaspora’s remittance needs, while young Indian adults are increasingly embracing crypto trading, according to a recent Chainalysis report.
Yet cryptocurrencies remain unregulated in the country, neither illegal nor formally sanctioned, following a 2020 Supreme Court decision that overturned a ban by the central bank amid concerns about its potential for money laundering and terrorism financing.
The ARC’s success could depend on whether India can establish regulatory frameworks to address consumer protection, market conduct and financial stability.
Analysts note the need for legislative clarity: would ARCs be recognised as digital government securities or as payment instruments? Would oversight fall solely under the central bank or be shared with the Securities and Exchange Board of India?
Defining the regulator will be crucial, as will clarifying if non-residents can hold the token, whether settlements can occur offshore and what mechanisms exist for clean conversion between rupees and foreign currency.
“Without statutory backing, disputes over redemptions, custody failures or censorship could land in legal limbo,” warned Anndy Lian, a Singapore-based adviser on blockchain policy.
Risks vs rewardsWhile Singapore, Hong Kong and Japan have experimented with similar digital tokens, India’s ARC could be the first public, tradeable stablecoin issued privately but backed by state assets.“India may do something no other major economy has attempted; turn its government securities into a programmable digital asset,” said Raj Kapoor, chairman of the India Blockchain Alliance.
Such a token would align with the Indian central bank’s push to introduce a digital currency and secure the benefits of crypto without dollar-denominated dependence, Kapoor said.
Success is far from certain, however. Overcentralisation risks rebranding government bonds without meaningful innovation, while under-regulation could introduce legal and financial vulnerabilities.
“The risk is that, if over-controlled, it becomes just dematerialised G-Secs [government securities] in a new wrapper with little innovation,” Kapoor said.
But if designed with care, it could be the catalyst that pulls decentralised finance and global liquidity into India’s bond market, strengthening the rupee and setting a new global benchmark.
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