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Stablecoins: Bridging Crypto and Traditional Finance

The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, a U.S. legislation aimed at regulating and promoting stablecoins, marks a major development in global crypto-financial systems. It could influence how countries, including India, engage with digital currencies.


What Are Stablecoins?

  • Definition: A type of cryptocurrency pegged to the value of a real-world asset like the US Dollar, Euro, or Gold.

  • Purpose: Designed to reduce volatility, unlike cryptocurrencies such as Bitcoin or Ethereum.

  • Use Cases:

    • Digital payments and remittances

    • Saving instruments in volatile economies

    • Acts as a bridge between traditional finance and crypto platforms


Types of Stablecoins

  1. Fiat-collateralized: Backed 1:1 by fiat currencies (e.g., Tether - USDT)

  2. Crypto-collateralized: Backed by other cryptocurrencies (e.g., DAI)

  3. Algorithmic Stablecoins: Use algorithms to manage supply and demand without backing (e.g., TerraUSD—collapsed in 2022)


Relevance for India

  • Offers potential for faster cross-border payments, financial inclusion, and CBDC integration.

  • Raises concerns about regulatory oversight, financial stability, and money laundering risks.

  • India’s Digital Currency Bill and RBI’s CBDC (e₹) are key to shaping stablecoin policy here.


UPSC Relevance

  • GS Paper 3: Indian Economy – Currency, Banking, and Financial Systems

  • GS Paper 2: Regulation and policymaking in emerging tech

  • Useful for understanding CBDCs, FinTech, and crypto regulation in India


UPSC Prelims Question

Q. With reference to Stablecoins, consider the following statements:

  1. Stablecoins are a form of cryptocurrency with fixed supply.

  2. They are usually backed by physical or fiat assets like gold or US dollar.

  3. They are more volatile than Bitcoin and Ethereum.

Which of the statements given above is/are correct?

A. 1 and 2 only

B. 2 only

C. 1 and 3 only

D. 2 and 3 only


✅ Answer: B. 2 only

Explanation:

  • Statement 1 is incorrect: Supply can vary; stability is achieved by pegging to assets.

  • Statement 2 is correct: Most are backed by fiat currencies or commodities.

  • Statement 3 is incorrect: Stablecoins are less volatile than other cryptocurrencies.


UPSC Mains Question (GS Paper 3)

Discuss the significance of stablecoins in modern financial ecosystems. How can India regulate stablecoins without stifling innovation in the digital economy?


 
 
 

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