Stablecoins pose serious risks to financial stability: RBI FSR

Stablecoins could experience destabilizing runs if holders lose confidence in their ability to redeem at par | Photo credit: Funtap

The claim that stablecoins can serve as settlement assets in a tokenized environment ignores an important vulnerability: stablecoins are tradable instruments whose prices can deviate from face value. Therefore, it remains unclear whether stablecoins would deliver lasting competitive advantages, the RBI said. Features often claimed as benefits, such as programmability, atomic settlement, and interoperability, arise from the underlying technologies (DLT, blockchain, tokenization) and may not be unique to stablecoins.

“The rapid growth of foreign currency-pegged stablecoins could lead to currency substitution and threaten a country’s monetary sovereignty. Easy access to dollar-denominated stablecoins could lead to ‘digital dollarization’, a scenario in which digital forms of dollar-denominated or dollar-pegged currencies replace local currencies. Furthermore, unlike traditional forms of dollarization, the stablecoins have the potential to more quickly displace local currencies through digital channels and network effects,” the statement said. FSR.

“The widespread adoption of foreign currency-denominated stablecoins could cause erosion of monetary control and weaken the transmission channels of domestic monetary policy. Moreover, since the effectiveness of monetary policy depends on the central bank’s ability to influence interest rates and the money supply, the rise of stablecoins and their impact on bank deposits and reserves could pose challenges to the implementation of monetary policy,” it added.

It is clear that since 2022, stablecoins have replaced bitcoin as the main vehicle for illicit crypto flows. Without adequate regulation, stablecoins – like other crypto assets – can be exploited for serious crimes, including money laundering, terrorist financing and weapons proliferation financing. Their relative stability could even make them more attractive for illegal activities. These risks are increasing for emerging economies due to capacity constraints.

a lot of risk

Stablecoins could undermine the ‘singleness of money’, which is the principle that all forms of money are freely interchangeable, that is, they trade at the same price and are accepted everywhere. Because private stablecoins will involve multiple issuers with different creditworthiness, without central bank or government support, their prices may deviate from the norm. Empirical evidence shows that stablecoins often fail to maintain their stable value and deviate from their fixed value both intraday and at the end of the day.

The recent downgrade of USDT (Tether), the largest stablecoin, to the ‘weak’ category by S&P Global Ratings due to increased exposure to risky assets in its reserves and persistent gaps in disclosure underscore the challenges stablecoins face in maintaining their stable value.1

Stablecoins can experience destabilizing runs if holders lose confidence in their ability to redeem at par. The perception of on-demand repayment creates financing risks due to mismatches in liquidity and asset maturity. These vulnerabilities can amplify shocks and spill over to other market segments and the traditional financial system by creating interconnections.

Furthermore, these vulnerabilities are likely to persist because stablecoins are expected to grow rapidly, are highly concentrated (two issuers account for roughly 90 percent of USD-denominated stablecoins in circulation), and have interchangeability issues between stablecoins. END

Published on December 31, 2025