The illusion of stability

N RECENT YEARS, stablecoins have garnered acclaim as a technological bridge between the volatile world of cryptocurrencies and the ostensibly dependable realm of fiat currency.

- SRINATH SRIDHARAN

Promoted as digital instruments that combine the efficiency of blockchain with the reliability of state-backed money, these tokens have become darlings of the decentralised finance movement and global payments innovation.

Yet, their moniker—stable—is as aspirational as it is misleading. Beneath the sheen of programmability lies a fragile architecture that is unregulated, opaque, and structurally misaligned with the monetary frameworks of sovereign states.

Nowhere is this tension more consequential than in India, where the confluence of public digital infrastructure, capital controls, and central banking autonomy renders stablecoins both redundant and potentially perilous.

At their core, stablecoins claim legitimacy through their peg to fiat currencies—most commonly the US dollar. But this link is not upheld by the institutional guarantees or fiscal instruments that make sovereign money truly stable. Instead, it is sustained by the credibility of private issuers, some of whom operate in regulatory grey zones, offer limited transparency on reserves, and lack enforceable redemption obligations. When confidence wanes, as shown by the implosion of TerraUSD in 2022, these coins can unravel swiftly and catastrophically, triggering digital bank runs without a central bank backstop.

Even where reserve-backed stablecoins function as designed, they present an insidious risk: the gradual erosion of monetary sovereignty. In emerging economies, especially those with open digital markets and rising fintech adoption, stablecoins can act as de facto foreign currencies. Their proliferation invites a form of algorithmic dollarisation—where local users shift to dollar-denominated digital instruments not out of choice, but for ease, familiarity, or perceived safety. In doing so, they bypass the domestic currency and the policy tools of the central bank.