Sanhita Chauriha

Abstract: This paper reads the story of stablecoins. They are best understood as emerging payment and settlement infrastructure. While often grouped within the broader crypto ecosystem, their primary function lies in enabling low-cost, near-instant, and programmable value transfer, particularly in cross-border contexts.

The paper identifies an overemphasis on technological form rather than economic function. Stablecoins are not primarily investment assets; they operate more like digital payment rails. So the focus is not how stablecoins are built, but what they do.

Global regulatory approaches show a clear convergence. Jurisdictions such as the EU, UAE, UK, Singapore, and Japan treat stablecoins as payment or e-money instruments, subject to strict reserve backing, issuer accountability, and central bank oversight. Algorithmic models are largely excluded, and stablecoins are permitted only insofar as they complement existing monetary systems.

India’s hesitation, however, is structural. The paper demonstrates that existing statutes, including the Payment and Settlement Systems Act, FEMA, and PMLA, provide only partial coverage, resulting in fragmented oversight. It proposes an approach wherein only fully backed INR-denominated stablecoins are permitted, algorithmic variants are prohibited, 1:1 domestic reserves are mandated, and stablecoins are linked to the digital rupee (e₹).

The paper concludes that stablecoins should be integrated, not ignored within a framework that preserves monetary sovereignty while enabling controlled innovation.

The blog piece is a two part article: Part I, Part II

I. Introduction

For stablecoins, the story does not begin with code or coins, but with trust. The  total market cap – $296 Bn, monthly transfer volumes –  $6.57 Tn, monthly active addresses – 53 Mn, stablecoin holders – 267 Mn. When it comes to trusting a new financial product or technology, Indian regulators are historically reactive rather than anticipatory. New instruments are first tolerated, then studied, and only eventually absorbed into the statutory framework. This was true of payment wallets, and of non-bank financial intermediaries. Stablecoins now occupy this liminal space that is present in practice, absent in law, and increasingly difficult to ignore.  They are widely used in practice like trading, payments, and moving value across crypto markets through Tether (“USDT”) and USD Coin (“USDC”), yet many legal systems have not clearly defined or regulated them. Currently, India does not have a law specifically governing stablecoins, yet they continue to exist and operate in the market.

Despite rapid growth in both market adoption and regulatory attention, there remains a wide gap in understanding how stablecoins actually work and what they offer. For several years, stablecoins were treated in Indian regulatory discourse as an extension of crypto-assets. This association was convenient, but inaccurate. Their significance lies elsewhere: in settlement efficiency, cross-border portability, and programmability. In other words, stablecoins work more like the infrastructure that helps the financial system run. In simple terms, they are like the pipes or rails that move money around in digital markets, helping transactions happen smoothly.

Since 2023, the pace of adoption has picked up markedly, reflecting both greater market maturity and a regulatory climate that is gradually becoming more permissive. Taken together, these shifts are encouraging deeper participation by large, incumbent financial institutions rather than merely early-stage or niche players. According to the a16z report titled “State of Crypto 2025: The Year Crypto Went Mainstream,” stablecoins power $46 trillion ($9 trillion adjusted) in annual transactions, rivaling Visa and PayPal. The average remittance via stablecoin costs as little as $0.01, compared to $44 through conventional banking routes. This efficiency is not just a technical feat; it is economic evolution. The World Bank average of ~6.4% and the G20’s 3% target are global benchmarks for cross-border transfer fees. Stablecoins are the missing connective tissue between the internet and money that is a programmable, internet-native layer for payments. In the same way that HTTP allowed information to flow seamlessly across the web, stablecoins could enable value to flow over digital rails in real time.

This article argues that stablecoins should not be understood primarily as mainstream crypto-assets but as emerging payment and settlement infrastructure. Their regulatory treatment must therefore be grounded in financial function rather than just technological form. In the Indian context, the challenge is not whether stablecoins should exist, but how they can be integrated into a regulatory architecture that preserves monetary sovereignty, capital controls, and central bank oversight.

Existing regulatory and academic discourse largely examines stablecoins through the lens of financial stability risks or crypto-asset regulation. While these concerns are important, they often overlook the functional role stablecoins play in payment efficiency, cross-border settlement, and programmable financial infrastructure. This article contributes to the literature by reframing stablecoins as payment-system instruments and by situating India’s regulatory hesitation within its institutional architecture of centralised monetary authority.

This article proceeds in five parts. It first explains the functional identity and technical structure of stablecoins and their principal use cases. It then examines the systemic and regulatory risks identified by global standard-setting bodies. Next, it surveys how major jurisdictions regulate stablecoins. Building on this analysis, the article evaluates India’s legal constraints under existing statutes and finally proposes a structured framework tailored to India’s institutional realities.

II. Stablecoins functional identity, technical form and use cases

From a legal perspective, the most persistent error in stablecoin discourse is excessive focus on technology rather than function. Indian financial regulation has never been technology-specific. It regulates outcomes, risks, and institutional roles. The legal question, therefore, is not how stablecoins are built, but what they do.

According to the Bank of England, stablecoins are digital representations of value designed to maintain price stability by reference to an external asset, most commonly a fiat currency. Their primary utility lies in facilitating payments and settlements. Unlike traditional crypto-assets, they are not marketed or primarily used as investment vehicles.

This functional orientation places stablecoins closer to payment instruments, stored-value facilities and settlement systems than to securities or commodities. The distinction is critical as Indian law already contains a dense framework governing payment systems, banking activities, and foreign transactions. Stablecoins challenge that framework not by rejecting it, but by operating outside the framework.

According to a World Bank report,  International remittances, trade settlements, and inter-firm transfers remain slow, expensive, and operationally complex. Stablecoins offer a narrow but powerful solution, which includes continuous settlement, reduced intermediary dependence, and near-instant finality. These features are not just ideologically disruptive; they are also operationally attractive. This means that the appeal of stablecoins does not come from challenging the financial system or replacing traditional institutions, but from making existing financial processes work more efficiently. In other words, stablecoins are not necessarily trying to undermine banks, central banks, or government authority over money. Instead, their main value lies in practical improvements, which are faster settlement of transactions, lower transaction costs, fewer intermediaries, and the ability to transfer value across borders almost instantly. For businesses and financial institutions, the attraction is therefore largely functional and efficiency-driven rather than ideological; they use stablecoins because they simplify payments and settlements, not because they seek to disrupt the existing monetary system. Because of all these factors, for Indian businesses operating globally, particularly in digital services, software exports, and decentralised supply chains, the appeal of stablecoin-based settlement lies in predictability rather than profit.

It is equally important to note what stablecoins are not being used for. There is little evidence that in India, they function as primary savings instruments or substitutes for domestic bank deposits at scale. Their value lies in movement, not hoarding.

Legal characterisation of stablecoins

The legal character of a stablecoin depends substantially on its stabilisation mechanism. Asset-backed stablecoins, supported by identifiable reserves, present a fundamentally different risk profile from algorithmic variants that rely on market incentives and arbitrage. The latter have repeatedly demonstrated structural fragility and pose risks that Indian regulators have little reason to accommodate. Any serious legal framework must therefore begin by excluding algorithmic stablecoins from the permissible regulatory perimeter. For example UAE’s Payment Token Services Regulation bans algorithmic stablecoins entirely. Even the EU’s Markets in Crypto Asset Regulation (“MiCa”) has banned algorithmic stablecoins.

According to the Bank for International Settlements (“BIS”) stablecoins employ a range of mechanisms to maintain parity with their reference value. At a broad level, they can be classified into four categories based on whether the issuer purports to maintain reserve assets to support the token’s value, and, where such reserves exist, the nature of those assets.

The first category pertains to fiat-backed stablecoins, which are supported by reserves denominated in sovereign currencies. Prominent examples include USDT and USDC, which are typically pegged to the US dollar. The second category is crypto-backed stablecoins, which rely on other digital assets. Tokens such as DAI within this category, often using over-collateralisation and smart-contract mechanisms to manage price stability. Commodity-backed stablecoins is the third category, which are structured around reserves consisting of physical commodities. Instruments such as PAX Gold and Tether Gold, for instance, seek to track the value of gold by holding corresponding commodity reserves. The fourth category are unbacked stablecoins which do not claim to maintain any reserve assets at all. Instead, they attempt to preserve price stability through algorithmic mechanisms, protocol-driven incentives, or supply adjustments. TerraClassicUSD and sUSD are examples of this model. As discussed above, algorithmic stablecoins are more or less banned in each jurisdiction where stablecoins are regulated.

In most cases, the reserve assets held by stablecoins are denominated in the same unit as the peg they seek to maintain. For example, US dollar-pegged stablecoins typically claim backing in dollar-denominated assets, while commodity-linked stablecoins often hold reserves of the relevant physical asset.

III. Risks associated with Stablecoins

While the initial use for stablecoins focused on facilitating liquidity in crypto markets, their role has expanded to include payment settlement, and collateralisation. The success of stablecoins has invited intense scrutiny from global standard-setting bodies (“SSBs”), which have identified a comprehensive array of risks, some systemic in nature, that must be addressed through coordinated regulation and supervision.

Risks as categorized by major SSBs such as the Financial Stability Board (“FSB”), International Monetary Fund (“IMF”), International Organization of Securities Commissions (“IOSCO”), BIS, and the Basel Committee on Banking Supervision (“BCBS”). These risks are grouped under seven thematic categories.

The first relates to monetary policy and systemic risk. At a macroeconomic level, widespread adoption particularly in emerging markets which have low growth & high inflation, such as Nigeria & Turkey, can lead to cryptoization as per FSB (see here and here), where digital tokens displace local fiat currency, thereby undermining a central bank’s ability to control inflation and manage monetary policy.

The second category is reserve and bank run risk. Stablecoins are susceptible to redemption and bank run risks, if reserves are poorly managed, illiquid, or opaque. In such cases a loss of market confidence can trigger mass withdrawals that the issuer cannot meet.

Thirdly, operational, legal and technological risks can be grouped in one category. Operational and legal risks are prevalent, stemming from a reliance on decentralized blockchain infrastructure, smart-contract exploits, and the absence of harmonized legal standards regarding ownership rights or insolvency procedures.

AML/CFT vulnerabilities are another form of risk. These assets present significant AML/CFT vulnerabilities due to their capacity for pseudonymous, cross-border value transfers, making them a potential vehicle for illicit finance.

The fifth category pertains to consumer protection and market integrity. Consumer protection remains a primary concern, as retail users often face information asymmetry regarding reserve compositions and may lack enforceable legal recourse in the event of platform failures or market manipulation. The sixth category is regulatory fragmentation, and the final one is related to a lack of clear regulatory classification.

The absence of a framework does not eliminate stablecoin usage; it merely removes supervisory visibility. This has also been highlighted in the thematic review on FSB Global Regulatory Framework for Crypto-asset Activities wherein it was reiterated that India has not moved a needle in terms of clarity on status quo of stablecoins.

In practice, technological and financial innovations rarely disappear simply because they operate outside formal regulation. Instead, they continue to evolve in informal supervised environments. In India’s case, stablecoins are already being used in limited but meaningful contexts such as cross-border payments. When such activity occurs outside a clear legal framework, regulators lose the ability to monitor flows, assess systemic exposure, and impose safeguards relating to consumer protection, reserve management, or financial integrity. In this sense, the absence of regulation does not eliminate the activity; it merely pushes it beyond the direct supervisory reach of authorities. As highlighted above, this concern has been reflected in the thematic review conducted by the FSB on the global regulatory framework for crypto-asset activities, which notes that several jurisdictions, including India, have yet to provide clear regulatory positioning on stablecoins. The report highlights that regulatory ambiguity can reduce transparency for supervisors and market participants alike, making it harder to identify risks early or design proportionate safeguards. A clearer policy stance, therefore, is not about encouraging stablecoin expansion, but about restoring regulatory visibility and ensuring that any existing or future use occurs within a monitored and accountable framework.

IV. Global Jurisdictions Pathways

Across the EU, Dubai, US, UK, Singapore, Hong Kong, South Korea and Japan, stablecoin regulation has evolved along a remarkably consistent doctrinal line: stablecoins are treated not as novel commodities or mere crypto-assets, but as value transfer instruments. The regulatory response has therefore been to absorb them into payments, e-money and banking-adjacent frameworks, rather than allow them to grow under lightly regulated market conduct regimes.

European Union

Under the MiCA, effective from mid-2024 and fully enforced by 2025, stablecoins are classified into two categories: Asset-Referenced Tokens (“ARTs”), backed by a basket of assets (fiat, commodities, crypto), and Electronic Money Tokens (“EMTs”), backed by a single fiat currency like the euro. Issuers of these tokens must maintain full 1:1 reserve backing with safe, liquid assets, with a large portion held as bank deposits. Algorithmic stablecoins are prohibited, as they lack explicit asset backing. Issuers must also publish monthly reserve reports, undergo independent audits, and ensure no interest is paid to stablecoin holders. All issuers must be authorised by a national financial regulator and are then eligible to operate throughout the EU via a passporting regime. Crypto-Asset Service Providers (“CASPs”), including wallets and exchanges, must also register and comply with MiCA. To ensure consumer protection, holders are granted redemption rights, and reserve assets must be invested only in secure, low-risk instruments. MiCA’s overarching goals are to safeguard monetary sovereignty and financial stability in the EU. As of early 2026, only 12 Crypto Asset Service Providers and 17 Electronic Money Token (“EMT”) issuers have been approved under MiCA across the entire EU: an extremely low figure compared to the thousands of firms previously operating.

United Arab Emirates

The United Arab Emirates (“UAE”) regulates stablecoins through the Payment Token Services Regulation issued by the Central Bank of the UAE (“CBUAE”), which came into effect on 21 August 2024.

This framework defines stablecoins, referred to as “Payment Tokens”, as virtual assets pegged to either fiat currency or other payment tokens. The regulation distinguishes between Dirham Payment Tokens (pegged to AED) and Foreign Payment Tokens (pegged to non-AED fiat currencies). A license from the CBUAE is mandatory for entities wishing to issue, custody, or convert these tokens, including overseas firms targeting UAE residents. Separately, the Securities and Commodities Authority (“SCA”) is developing a regulatory regime for stablecoins backed by commodities, and Dubai’s Virtual Asset Regulatory Authority (“VARA”) oversees certain activities within the emirate. There are limited exemptions for loyalty programs and payment tokens used exclusively within closed-loop systems.

Further, to conduct regulated stablecoin activities, firms must obtain licenses for specific services: issuing tokens, providing custody and transfer, and offering conversion services. Entities promoting stablecoin services must either be licensed or officially appointed by a licensed firm. Moreover, reserve and redemption requirements are implied but not fully detailed in the current regulation. The CBUAE retains discretion to designate any virtual asset as a Payment Token, even if not issued by a licensed provider. Notably, the regulations do not apply to the UAE’s Financial Free Zones; specifically the Dubai International Financial Centre (“DIFC”) and Abu Dhabi Global Market) (ADGM), which have their own rules.

Overall, the UAE’s approach reflects a cautious but proactive stance, aiming to support innovation while ensuring financial stability and regulatory clarity in the growing digital asset market

Additionally, the US treats fiat-backed stablecoins primarily as payment instruments, with regulation focusing on issuer licensing, reserve quality, disclosure, and redemption at par. Oversight is fragmented across federal and state authorities, but the policy direction is toward payments-level supervision for stablecoin issuers. The UK classifies stablecoins used for payments as regulated payment instruments, bringing issuers and custodians within the Financial Services and Markets framework. The regime emphasises authorisation, safeguarding of backing assets, and guaranteed redemption. In Japan and Singapore stablecoins are legally recognised as digital representations of fiat usable for payments, but issuance is restricted to banks or tightly regulated entities, with mandatory 1:1 backing, segregation of reserves, and enforceable redemption rights. Hong Kong and Dubai follow suit by regulating stablecoins as payment or settlement instruments under financial regulators rather than securities-only regimes.

What binds these jurisdictions together is not uniform rule-text, but a shared regulatory philosophy built around the following four pillars.

First, monetary anchoring; which translates to the idea that only fiat-referenced, fully backed stablecoins are tolerated, while algorithmic or endogenous stabilization models are either prohibited (EU, Japan) or effectively sidelined through capital and redemption requirements.

The second relates to issuer accountability over protocol neutrality. Regulators consistently reject the idea that decentralisation negates responsibility, instead placing legal liability squarely on identifiable issuers and reserve managers.

The third pillar is payments and systemic risk primacy. Stablecoins are supervised primarily for their impact on payment systems, bank funding, and run risk. Hence, the focus on high-quality liquid reserves, daily reconciliation, disclosure, and caps or enhanced supervision for large issuers.

Finally, subordination to public money and central bank authority is another important principle. Stablecoins are permitted only insofar as they complement existing monetary systems, remain interoperable with regulated banking rails, and do not undermine central bank control explaining why many frameworks explicitly position stablecoins alongside, not in competition with, CBDCs. The convergence is unmistakable: innovation is allowed, but only within a regulatory perimeter designed to preserve financial stability, consumer trust, and monetary sovereignty.

To read Part II, click here.

Sanhita Chauriha is a Technology Policy Lawyer at CoinDCX. She previously worked in the Law and Technology vertical of the Vidhi Centre for Legal Policy.