India’s Chief Economist Warns Dollar Stablecoins Threaten Global Monetary Policy

Dollar stablecoins put pressure on monetary policy levers

India’s Chief Economic Adviser V. Anantha Nageswaran said U.S. dollar stablecoins pose challenges for global monetary policy, arguing they can weaken transmission, complicate liquidity management, and erode seigniorage for non-U.S. jurisdictions. Speaking in Mumbai, he added that stablecoins can act as cross-border money substitutes, shifting savings outside domestic systems and creating a parallel channel for payments and store of value. He cautioned that such dollar-linked tokens could gain traction in advanced economies even as India’s need is limited.

Why seigniorage and transmission matter

Seigniorage, the profit from issuing currency, helps fund public services and crisis response. If residents shift from local currency to dollar stablecoins, the central bank’s balance sheet may shrink relative to the economy, reducing room to stabilize markets. Transmission can suffer when deposits migrate to token issuers or money-market instruments behind the stablecoin reserves; policy rate moves then pass through unevenly to lending costs, especially for smaller banks. These risks, he said, are macro-relevant, not niche.

Bank funding and market plumbing

A rapid take-up of dollar stablecoins can pull cash away from local banks into token reserves that often sit in short-dated U.S. Treasuries. This intensifies competition for deposits and changes intermediation, which can raise funding costs at home. Earlier analysis has also highlighted feedback loops between large stablecoin reserves and Treasury market dynamics, given their heavy allocations to bills and repos. Policymakers therefore watch both banking and bond-market spillovers.

India’s view: UPI at the core, limited domestic need

Nageswaran contrasted India’s environment with others. He argued India has less reason to adopt dollar stablecoins because domestic rails like the Unified Payments Interface deliver instant, low-cost transfers, including QR acceptance by small merchants and bank-to-bank settlement at scale. With efficient retail payments and prudential concerns about crypto speculation, India’s policy priority is to preserve monetary autonomy and financial stability, not to dollarize daily transactions via tokens.

Global uptake and the regulatory split

Demand for dollar stablecoins has grown fastest where dollar assets are attractive and local financial frictions are high. As jurisdictions debate rules, a split is emerging. Some economies are sketching bank-like guardrails and treasury-backed reserves to bring stablecoins into the perimeter. Others, including India, remain cautious, signaling that bespoke crypto laws may be unnecessary or premature while general financial rules and payments innovation already meet most needs. The divergence raises coordination questions when tokens move across borders instantly.

Policy menu: containment, equivalence, or coexistence

Officials weigh three paths. Containment limits access to foreign stablecoins and channels users into domestic rails. Equivalence applies bank-style capital, liquidity, and supervision to issuers, narrowing gaps with regulated deposits. Coexistence allows stablecoins in defined niches, for example wholesale settlement or cross-border remittances, while discouraging retail dollarization. Each path trades off innovation with control. Nageswaran’s remarks suggest India will lean toward containment plus modernization of existing rails.

Cross-border spillovers and dollar dominance

Because leading tokens are dollar-pegged, their growth can amplify dollar use in third countries, complicating exchange-rate management and capital-flow cycles. Local authorities can see faster pass-through from U.S. financial conditions into domestic credit, even when policy goals diverge. For emerging markets, this adds a channel through which external shocks spread, potentially forcing pro-cyclical responses. The adviser’s warning, in short, is about imported monetary policy via code.

What would reassure policymakers

Three safeguards would ease concerns. First, issuer transparency on reserves, maturities, and counterparties, with daily reporting and independent audits. Second, redemption at par for qualified users under stress, supported by pre-arranged liquidity lines that do not rely on public backstops. Third, hard limits on retail holdings in non-home jurisdictions, coupled with clear anti-money-laundering and travel-rule compliance. These measures would not eliminate dollarization risk, but they would reduce run dynamics and market spillovers.

The CBDC question, and why payments design matters

Some central banks see retail or wholesale CBDCs as an alternative to private tokens for instant settlement. India’s emphasis, however, has been that well-designed bank rails like UPI already deliver most of the benefits without creating new monetary frictions. The lesson is architectural: public infrastructure that is open to banks and fintechs can achieve speed and inclusion while keeping monetary sovereignty intact.

Market angle and investor takeaways

For banks in emerging markets, stablecoin adoption abroad could still affect funding costs through competition for deposits and shifts in savings preferences. Payment firms exposed to corridors where tokens are popular may see faster cross-border flows, but also tougher compliance. For sovereigns, debt management offices should monitor the investor base in short-tenor paper if stablecoin reserves scale further, since concentrated buyers can amplify rate swings.

What to watch next

Signals that matter include whether major economies finalize bank-style rules for stablecoin issuers, how quickly token market caps grow relative to local deposits, and whether emerging markets place quantitative limits or disclosure mandates on foreign-pegged tokens. In India, officials will likely keep pointing users toward UPI and formal banking channels while reiterating that dollar stablecoins are not essential for domestic payments.