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

Part 2

V. India’s Structural Constraints

India’s hesitation is best understood not as hostility to innovation, but as a consequence of institutional design. India’s unease with stablecoins is not ideological but structural.  The Indian monetary system is built on capital control. Capital account convertibility is partial, not absolute.

Money in India cannot move freely across borders for all types of financial transactions. Under the framework of the Foreign Exchange and Management Act, 1999 (“FEMA”), India allows relatively greater freedom for current account transactions such as trade payments, education expenses, and remittances. However, capital account transactions which involve movement of capital for investments, borrowing, lending, or acquisition of foreign assets are subject to restrictions, limits, and regulatory approval. For example, Indian residents can invest abroad only within specific limits such as the Liberalised Remittance Scheme, and foreign investments into India are regulated through sectoral caps and approval routes.

Payment systems are tightly regulated, and monetary authority is centralised within the RBI. Stablecoins disrupt this architecture not by violating its rules, but by operating in spaces the rules did not anticipate. Unlike traditional payment instruments that move through supervised banks and authorised payment systems, stablecoins risk creating parallel rails where the regulator loses line-of-sight overflows, velocity, and end-use of funds, weakening the RBI’s ability to enforce FEMA, manage balance-of-payments pressures, and conduct effective monetary policy. This loss of visibility is a huge systemic risk for the Reserve Bank.

Against this backdrop, India’s regulatory posture is also shaped by a deliberate effort to protect and scale domestic, regulator-anchored innovation, most notably UPI & CBDC, which demonstrates that real-time, low-cost digital payments can flourish within the perimeter of central bank oversight. UPI’s success rests precisely on retained control over settlement, data, and systemic risk; while still enabling private innovation at the application layer. India’s stated ambition to take UPI global further reinforces this model: openness, but on sovereign terms. With UPI getting linked to other fast payment systems of countries like Singapore and Thailand, it’s going on to the next level in terms of cross border transfers at the same time.

VI. Existing statutes in India and their inadequacies

If stablecoins were to scale materially in India, multiple statutes would be implicated, though none of them fully adequate on their own. The challenge of accommodating stablecoins within the Indian legal system is fundamental, implicating foundational doctrines that structure the exercise of state power.

Payment and Settlement Systems Act, 2007

The Payment and Settlement Systems Act, 2007 (“PSS Act”) provides the most natural entry point. At the threshold, stablecoin issuance and redemption would likely be characterised as the operation of a payment system, bringing such activity within the supervisory ambit of the PSS Act. For example, a compelling case for bringing stablecoins within the scope of the PSS Act lies in the fact that their practical use closely resembles existing electronic payment mechanisms. Fiat-pegged stablecoins, in particular, operate in a manner similar to prepaid payment instruments, as they represent stored value linked to a fiat currency and can be used to make payments or transfer funds between users. In addition, digital wallets and exchanges that facilitate the sending, receiving, and redemption of stablecoins perform intermediary functions comparable to payment aggregators and payment service providers.

Foreign Exchange and Management Act, 1999

When analysed through the FEMA, stablecoins challenge the traditional dichotomy of current and capital account transactions. That said, they are not included in FEMA as the asset class categorisation itself is unclear.

The Prevention of Money Laundering Act 2002

The Prevention of Money Laundering Act, 2002 (“PMLA”) already applies to virtual digital asset service providers, but compliance obligations alone cannot substitute for prudential regulation.  PMLA applies to entities dealing with virtual digital assets, such as exchanges and wallet providers, by requiring them to follow financial integrity rules like customer due diligence, transaction monitoring, record-keeping, and reporting suspicious transactions to the Financial Intelligence Unit. However, these obligations are primarily designed to prevent illicit financial flows, not to regulate the financial soundness of the institutions themselves. While AML/KYC rules address who is transacting and whether the activity is lawful, they do not ensure that stablecoin issuers are financially stable, properly governed, or capable of honouring redemption obligations. Prudential regulation typically overseen by the Reserve Bank of India would involve additional safeguards such as capital requirements, reserve backing, liquidity management, risk controls, and supervisory oversight. Without these prudential safeguards, AML compliance alone cannot prevent risks like issuer insolvency, reserve mismanagement, or run-like redemption pressures that could affect users and financial stability.

Additionally, from a financial integrity perspective, stablecoin issuers, exchanges, and custodial wallet providers would fall within the category of reporting entities, thereby attracting comprehensive obligations relating to customer due diligence, periodic re-verification, record retention, and the reporting of suspicious transactions to the Financial Intelligence Unit, including enhanced scrutiny of dormant or inactive accounts. Corporate structuring would also assume significance, as entities engaged in stablecoin issuance or reserve management would be subject to company law requirements concerning board composition, independent oversight, audit mechanisms, and fit-and-proper standards for key managerial personnel.

In parallel, the technology stack underpinning stablecoin operations would be subject to information security and data governance obligations, encompassing smart-contract resilience, mandatory cyber-incident reporting, and compliance with data protection norms relating to storage, encryption, and lawful processing of personal data. Consumer-facing stablecoin offerings would further attract liability under consumer protection law, particularly in relation to mis-selling, misleading representations, and unfair trade practices, with platform-based distribution models potentially falling within the scope of e-commerce regulation.

To the extent stablecoin models rely on integration with the formal banking system: whether through escrow arrangements, reserve custody, or redemption channels; the regulatory architecture governing banks and the central bank’s monetary authority would be implicated, especially in relation to reserve management, prudential safeguards, and the role of scheduled banks in safeguarding customer funds. This statutory fragmentation is not sustainable if stablecoins move from the margins to the mainstream in India in coming years.

Stablecoins simultaneously engage several regulatory domains without a single coordinating framework. In most activities, there is a clearly identified primary regulator and statute that anchors supervision. With stablecoins, however, different aspects of the activity would fall under separate laws like payments under the PSS Act, cross-border flows under the FEMA, financial integrity under the PMLA, and data governance under the Digital Personal Data Protection Act, 2023 (“DPDPA”) each overseen by different authorities. When the activity is small, this fragmented oversight can function tolerably. However, if stablecoins scale into widely used payment and settlement instruments, the absence of a clear lead regulator, unified licensing framework, and coordinated supervisory architecture can create regulatory gaps, overlapping compliance burdens, and uncertainty about accountability during crises. This is why fragmentation becomes unsustainable in this context: stablecoins combine features of payments infrastructure, financial instruments, and cross-border value transfer, meaning that without a coherent framework anchored by a primary authority, regulators may struggle to manage systemic risk, enforce prudential standards, and maintain visibility over monetary flows.

Currently, the regulatory landscape is divided across several authorities, each responsible for a different aspect of oversight. The RBI is responsible for issuers, reserves, and systemic risk; FIU-IND handles AML/CFT monitoring; MeitY and CERT-In are responsible for cybersecurity and intermediaries; the Consumer Protection Act governs mis-selling, redemption requirements, and safeguards for consumers; and finally, the DPDP Act looks into privacy matters relating to issuers, redemption, and data principals.

VII. Towards an Indian Legal Architecture for Stablecoins

An Indian stablecoin framework must be grounded in regulatory realism rather than ideological positioning. Regulatory realism is designing rules based on how markets, technology, and institutions actually function in practice, rather than on abstract positions for or against a technology. It recognises that stablecoins already exist, are being used for certain payment and settlement functions, and interact with existing financial infrastructure. A regulatory realist approach therefore asks practical questions: what risks do stablecoins create, which institutions are best placed to supervise them, and how can they be integrated into the existing monetary and payments architecture without undermining financial stability. It focuses on workable solutions; such as licensing, reserve requirements, supervision, and limits on usage rather than debating whether the technology itself should be supported or opposed.

A coherent Indian stablecoin regime must begin with a tight regulatory perimeter and unambiguous asset classification, anchored in monetary sovereignty and systemic risk containment. At the threshold, only fiat-backed INR-denominated stablecoins should be permitted, reflecting the RBI’s core mandate over currency and payment stability. It is in line with UAE’s policy wherein they have called out different categories for Dirham backed stablecoins and other currency backed stablecoins to keep the rules tightly regulated. The regulatory approach adopted by the CBUAE under the Payment Token Services Regulation offers a useful template because it recognises that not all stablecoins pose the same regulatory risks and therefore classifies them based on the currency backing. By distinguishing between Dirham-backed payment tokens and foreign-currency payment tokens, the framework allows the regulator to apply tighter control over domestic currency-linked stablecoins while still permitting foreign-currency stablecoins under clearly defined licensing and supervisory conditions. This risk-based categorisation, combined with mandatory licensing for issuance, custody and conversion activities, creates regulatory clarity without banning innovation. Such a model is particularly suitable for policy importation because it balances monetary sovereignty with market development, something highly relevant for countries considering stablecoin regulation.

Algorithmic, unbacked, or partially collateralised coins should be expressly prohibited given their demonstrated fragility and reflexive run risk. Non-INR stablecoins may be tolerated only at the institutional edge, subject to heightened reporting and use-restrictions for retail participants. Within this perimeter, a functional classification is essential.

The purpose of classification is not to create artificial categories, but to reflect materially different risk profiles, use-cases, and regulatory touchpoints. Retail-facing stablecoins, institutional settlement instruments, and cross-border INR-linked coins interact with different statutes, users, and systemic risks, and therefore cannot be governed effectively through a single regulatory approach. Distinguishing between them allows regulation to be proportionate, activity-based, and jurisdiction-specific, rather than blanket.

When it comes to licensing and prudential design there should be a risk based framework that should ideally be followed, an activity-linked model rather than a one-size-fits-all approach. Issuers performing payment functions may be licensed as Payment System Operators under the PSS Act, while a bespoke RBI-issued Stablecoin Issuer Licence should be created instead of the present authorised dealer licenses, to address balance-sheet, governance, and technology risks unique to tokenised money. Cross-border issuers should operate only through a GIFT-IFSC sandbox licence, with FEMA overlays. Prudentially, a strict 100% reserve requirement i.e, limited to Indian bank deposits and short-dated GoI Treasury Bills (≤90 days) is non-negotiable, complemented by segregated trust accounts to ensure bankruptcy remoteness. Ongoing assurance must include monthly reserve attestations by statutory auditors and robust governance norms: independent directors with payments and cyber expertise, dedicated audit and risk committees, multi-signature smart-contract controls, and cyber-resilience aligned with CERT-In 2022 standards.

Finally, legitimacy and scale depend on credible consumer protection, financial integrity, and cross-border coherence.

Full PMLA compliance, mandatory FATF Travel Rule implementation, and real-time FIU-IND monitoring. Further, retail users must enjoy a statutory right to redemption at par, with T+2 settlement timelines, clear disclosures on fees, risks, and reserve composition, and recourse to an RBI-supervised ombudsman. Also, interoperability with the e₹ should be explicit. The CBDC must be a settlement asset of last resort, with stablecoins providing programmability and cross-border rails under shared ISO 20022 and ISO 24165 standards. Cross-border use must remain tightly controlled, limited to INR-pegged coins, and reciprocal arrangements with peer regulators (MAS, HKMA, UAE, EU).

That said, India’s stablecoin posture should be framed not as an alternative to the e₹ project, but as a complementary regulatory layer informed by global regulatory convergence. India’s CBDC project provides a structural advantage rather than a constraint. The e₹ establishes the sovereign settlement layer, while stablecoins if permitted, should operate strictly as regulated instruments at the application and cross-border edge, never as independent monetary substitutes. The regulatory task, therefore, is not whether to allow stablecoins, but how to integrate them into an RBI-anchored architecture that preserves monetary sovereignty, ensures transaction visibility, and protects domestic payment innovation such as UPI. Drawing on global standards and India’s own institutional realities, the following recommendations outline a pragmatic path forward.

To conclude, key regulatory recommendations for India’s stablecoin framework can be categorized into eight aspects. First, only fully fiat-backed, INR-denominated stablecoins must be permitted for domestic use. Second, 1:1 reserves limited to Indian bank deposits and short-dated GoI Treasury Bills, held in segregated trust accounts, with no currency mismatch permitted for INR-pegged tokens must be mandated. Third, a bespoke RBI Stablecoin Issuer Licence must be created, rather than relying on existing authorised dealer licenses, to address token-specific governance, smart-contract risk, and operational resilience. Fourth, stablecoin redemption and settlement must be anchored to the e₹, requiring par convertibility into CBDC and positioning the e₹ as the settlement asset of last resort. Fifth, cross-border use within GIFT-IFSC must be ring-fenced, allowing INR stablecoins only for trade settlement and offshore INR use under approved corridors and reciprocal regulatory arrangements. Sixth, full financial integrity controls must be imposed, including PMLA coverage, Travel Rule compliance, and real-time FIU-IND access. Seventh, strict reserve requirements must be laid down, with a mandate that any INR-pegged stablecoins be backed 1:1 by liquid INR assets held in segregated accounts at regulated domestic banks to prevent “deposit flight” and ensure par redemption. Finally, the EU’s and UAE’s approach must be adopted by prohibiting algorithmic or unbacked “stablecoins” for public use due to their inherent risks to financial stability.

Taken together, these measures allow India to absorb the lessons of global stablecoin regulation without importing foreign monetary risk models. Stablecoins, when subordinated to the e₹, aligned with UPI’s success, and constrained within RBI oversight, can serve as instruments of controlled experimentation rather than vectors of systemic disruption. This is regulatory realism not ideological resistance and it reflects how India can modernise its monetary architecture without surrendering control.

Way Forward

Ultimately, the global shift toward stablecoins is a formal integration into the global rulebook where trust is driven by regulation rather than code. For India, the way forward requires transitioning from a posture of reactive hesitation to one of regulatory realism, absorbing stablecoins under the strict supervision of the Reserve Bank of India. This strategic encapsulation will successfully modernise cross-border trade and payment efficiency without compromising monetary sovereignty or capital controls.

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.