The Reserve Bank of India has issued a stern warning about the potential risks posed by widespread stablecoin adoption, stating it could significantly threaten India's monetary sovereignty and financial stability. The central bank outlined these concerns in a special feature within its bi-annual financial stability report released on Wednesday, emphasizing that "trust in money is the foundation for maintaining financial stability."

Key Risks to Monetary Control

The RBI emphasized that stablecoins create important financial stability risks due to their inherent vulnerabilities. The central bank particularly highlighted concerns about foreign currency denominated stablecoins, which could erode monetary control and weaken the transmission channels of domestic monetary policy. The RBI maintains a cautious stance on crypto assets, including stablecoins, prioritizing sovereign digital infrastructure to safeguard monetary sovereignty amid global shifts.

Fundamental Shortcomings of Stablecoins

According to the RBI, stablecoins position themselves as an alternative form of money but fall short of foundational requirements expected from a sound monetary system. The central bank identified three critical deficiencies that make stablecoins inadequate as a monetary instrument.

The RBI noted that in their short history, stablecoins have proven volatile and vulnerable to confidence shocks and structural fragilities, citing episodes such as the May 2022 collapse of TerraUSD and the March 2023 US banking turmoil. Currently, the central bank maintains that risks from stablecoins to macrofinancial stability outweigh their purported benefits.

CBDC Advocacy and Policy Position

The central bank strongly advocates for Central Bank Digital Currencies over privately issued stablecoins. The RBI argues that CBDCs can achieve the benefits stablecoins claim to offer—efficiency, programmability, and instant settlement—while maintaining the credibility and safety of central bank money. The central bank emphasized that central bank money must remain the ultimate settlement asset and anchor for trust in the financial system.

Regulatory and Security Concerns

The RBI highlighted several critical concerns regarding stablecoin regulation and security. Without adequate regulation, stablecoins can be exploited for serious crimes, including money laundering, terrorism financing, and weapons proliferation financing. The central bank cautioned that stablecoins can circumvent controls on capital movement and complicate macroeconomic management, particularly for emerging economies like India where capital flow management frameworks play a crucial role in preserving external sector stability.

Stablecoins can bypass current foreign exchange transfer systems, impeding the effectiveness of capital flow management measures designed to maintain macroeconomic stability, safeguard foreign exchange reserves, and manage risks associated with sudden and volatile capital flows.

Global Regulatory Landscape

The RBI acknowledged that stablecoin growth could be driven by emerging legal and regulatory frameworks across major jurisdictions between 2023 and 2025, including the United States, European Union, Singapore, Hong Kong, and Japan. However, the central bank maintains its position that jurisdictions must carefully assess attendant risks and determine policy responses appropriate to their financial systems to mitigate risks posed by rapid stablecoin growth.

The Reserve Bank of India released its December 2025 Financial Stability Report on Wednesday, affirming that India's financial system maintains resilience and stability despite an uncertain global economic environment characterized by elevated risks and market volatility. The comprehensive assessment represents the collective evaluation of the Sub-Committee of the Financial Stability and Development Council regarding systemic risks to financial stability.

Global Economic Landscape Shows Mixed Signals

The RBI acknowledged that the global economy has demonstrated resilience, bolstered by fiscal measures, front-loaded trade activity, and robust investment linked to artificial intelligence developments. However, the central bank cautioned about persistent downside risks stemming from heightened uncertainty, elevated public debt levels, and potential disorderly corrections in financial markets.

According to the report, global financial markets present a paradox of surface strength masking underlying vulnerabilities. The sharp increase in equity and risk asset prices, combined with the expanding role of non-bank financial intermediaries and their growing interconnectedness with traditional banks, has contributed to global financial fragilities. The rise of stablecoins adds another layer of complexity to the evolving financial landscape.

Indian Economy Demonstrates Continued Strength

Against this global backdrop, the RBI emphasized that India's economy continues expanding at a healthy pace, supported by strong domestic demand, benign inflation trends, and prudent macroeconomic policies. The domestic financial system maintains its robust and resilient character, aided by strong balance sheets, accommodative financial conditions, and low market volatility.

Banking Sector Maintains Sound Financial Health

The central bank reported that scheduled commercial banks continue to exhibit sound financial health, characterized by strong capital and liquidity buffers, improved asset quality metrics, and robust profitability performance. Macro stress test results demonstrated that banks are well-positioned to absorb potential losses under hypothetical adverse scenarios while maintaining capital levels significantly above regulatory requirements.

The stress testing framework also confirmed the resilience of mutual funds and clearing corporations, indicating broad-based stability across different segments of the financial system. Non-banking financial companies maintain their resilient positioning, supported by adequate capital buffers, stable earnings performance, and improving asset quality indicators.

Insurance Sector Stability Reinforces System Strength

The insurance sector continues to demonstrate stability, with the consolidated solvency ratio remaining above the prescribed minimum threshold. This performance reinforces the overall strength of India's financial ecosystem and provides additional confidence in the system's ability to weather potential challenges.

Despite the positive assessment, the RBI acknowledged that near-term risks from geopolitical tensions and trade-related uncertainties remain present, requiring continued vigilance and prudent risk management across the financial system.