Welcome to Indianomics. I'm Latha Venkatesh. Today's Indianomics is on stablecoins. Actually, why stablecoins? Today, the total market cap of all cryptocurrencies as of this moment is $3.9 trillion. It has surpassed India's GDP, which economists peg at $3.86 trillion as of June 30th. Today's market cap of cryptocurrencies is a 50% growth from year-ago levels and a 10x growth since 2020. The reason for the recent spurt is the Genius Act in the US, which has legalized the issue of stablecoins by private entities. Now, one may have many kinds of issuers and currencies, like say Amazon money or Walmart money. Lesser-known crypto issuers and tech companies may also issue their own stablecoins, and the market may value them at less than their face value of $1. Also, since stablecoins can seamlessly buy cryptocurrencies, it's possible that illegal and ill-gotten gains may change hands via stablecoins and cryptocurrencies. To understand how our lives may change, we have with us Professor Eswar Prasad. He's professor of economics at Cornell University, and he has recently authored a book, The Future of Money, and therefore has dealt with cryptocurrencies in detail in that book. Professor Prasad, thank you very much indeed for your time, sir. So, can you begin by first explaining how stablecoins differ from cryptocurrencies, and then we delve into the Genius Act.
Thank you for having me on your show, Latha. So this is indeed an important moment for the evolution of cryptocurrencies, which are becoming increasingly mainstream. Now, the key difference between stablecoins and so-called decentralized cryptocurrencies like Bitcoin and Ethereum is that when you think about something like Bitcoin, there is nothing clear anchoring its value, and it's ended up having very volatile value. So while Bitcoin was originally created as a method of payments that would not require using a traditional commercial bank or credit card provider, its very volatile value has meant that it's really not useful for payments. Stablecoins, on the other hand, get their stable value by being pegged to a fiat currency like the US dollar, or conceivably someday something like the Indian rupee. And each unit of a stablecoin is backed up by reserves of that fiat currency. So, for instance, dollar-backed stablecoins are backed up by reserves of US government securities and so on. So that stable value allows them to be used in payments. So what this means is that stablecoins, while they're being used as payments in a sense, get away from the philosophy of Bitcoin, which is to have everything be decentralized, including the issuance, the value, the governance, and so on. Stablecoins are issued by a particular issuer who validates the transactions and so on. So they are more centralized, but they do seem to work at what cryptocurrencies were supposed to deliver, which is an alternative method of payments.
Fair point, sir. In fact, they're going to be regulated by the FDIC, by perhaps even the US Fed and state banking regulators. So it's not quite like Bitcoin, which is kind of regulated by algorithms. But let me come to the Genius Act itself. It says that there will be state regulators for issuers who issue less than $10 billion in stablecoins, and those who issue more will be regulated by probably the FDIC or the OCC. Now, when do you think this regime will start? Are we still waiting for rules to be written?
That's right. The Genius Act was passed by the US Congress and was signed into effect by President Trump a few weeks ago. But the actual act will take effect either in January 2027 or four months after all the rules are written by the relevant agencies. Now, it's worth keeping in mind the context here, and the context is that this administration here in the United States is very favorable to crypto. So, the Genius Act is one part of what I think will be a raft of crypto-friendly legislation that is passed by this administration. And certainly, stablecoins are going to play a very important role in the world of decentralized finance, but also as an on-ramp and off-ramp between traditional finance, as epitomized by commercial banks, for instance, and decentralized finance, which is the world of cryptocurrencies. Now, the reality in the US is that stablecoins have already gotten a lot of traction. The market capitalization of the two major stablecoin issuers in the US, Tether and USD Coin, already exceeds $200 billion, and this legitimization of stablecoins is certainly going to give a huge boost to not only these two stablecoin issuers but, as you mentioned, other private stablecoin issuers as well.
Yeah. Now, you know, for Tether, which is already widely used, to be accepted in the Genius Act, say for instance, say Amazon wants its customers to pay via Tether, for that there are still some steps, right? Because Tether will have to adhere to monthly disclosures of how much assets it has. The Genius Act has a lot of rules that stablecoin issuers will have to have transparency of their assets.
That's absolutely right. Now, the interesting thing is that while a stablecoin issuer like Tether has been somewhat open about its reserves, it's not been fully transparent. But nevertheless, the market does seem to take the issuers of Tether at face value, because the value of Tether has remained pretty close to one, except for a couple of episodes where it deviated a little bit from that value. There are other stablecoin issuers like Circle, which issues USD Coin, the second-largest stablecoin, which has traditionally been much more transparent about its reserve holdings. But certainly, this act will bring uniformity to the sector. Any stablecoin issuer will have to be much more open and transparent and provide an auditing trail for the reserves they hold, so that market participants and users can have much more faith that each unit of a stablecoin is in fact backed up by liquid, safe securities.
What is your sense, Professor? Do you think that people will stop, or at least there will be less usage of credit cards and debit cards, and people will move over to stablecoins? Because there are a multitude — there's already Tether and Circle. It is possible Amazon and Walmart don't use the existing coins but issue their own. There could be more people. What is your best guess as to what will be the regime? Will card — Visa and Mastercard lose their prominence?
So we're certainly entering a wild and interesting world of private payment mechanisms circulating in tandem with the traditional payment mechanisms like fiat currencies issued by central banks and also commercial bank deposits, which have been a very important payment mechanism. Now, it's worth thinking about why stablecoins are getting so much traction, and I think this is where stablecoins have really proved useful in terms of showing us how much more efficient payments can be, both domestically within the world of decentralized finance and especially in terms of cross-border payments, where there are enormous inefficiencies, very high costs, very slow processing speeds. So in my mind, the real legacy of stablecoins, whatever happens to stablecoins themselves, is showing us how much more efficient payments can be. Now, given that we have the legitimization of stablecoins, certainly there are going to be incentives for private companies like Amazon, Walmart, perhaps even social media companies like Meta, which once upon a time did have a stablecoin project that was killed by the US government, to go back to starting to issue their own stablecoins. And there is logic to this, because at one level you want to think about private firms that have very large balance sheets, that have very large networks, adding on a payment mechanism on top of their existing networks. The difficulty, of course, is that we're going to have multiple payment mechanisms, and it's not entirely clear if all of these are going to be equally reliable. So it's a good thing from the point of view of consumers and businesses that the cost of payments, the frictions in payments, both domestic and international, are going to decline. But we could be in a period of some volatility when we have multiple payment mechanisms, and some of them turn out to be less than ideal. And as you pointed out in the introduction, some of them could end up facilitating illicit activities, money laundering activities, and so on. So the big question is whether we are moving to a more stable regime or one that is in some ways efficient but could also create a lot of instability.
What's your sense about cross-border, sir? I mean, I'm trying to look at the impact on India first, or countries like India. If we don't recognize stablecoins, if we stay quiet and mum about it, then obviously I cannot pay for an Amazon product with stablecoins. In that case, do you think countries like us will be impacted in any way?
It is a potentially worrying time for central banks around the world. Even the European Central Bank has come out with a statement that it is worried that it could lose monetary policy autonomy if stablecoins become much more prevalent, especially because it looks like the stablecoins that the world desires are really dollar-backed stablecoins. And given that a dollar-backed stablecoin, whether issued by a company like Tether or a big company that has a global footprint like Amazon and so on, that could have much more trust from consumers and businesses around the world than local currencies. I don't think in India we face as much of a problem, but certainly there are concerns that these stablecoins issued by US issuers in particular could start becoming very widely used around the world. Now, certainly regulations in a country like India can to some extent forestall this from happening, but the reality is that it's going to be very difficult to manage the use of stablecoins by private parties, especially because the US financial system remains dominant, and for people to shift onto their financial system is going to become a lot easier thanks to the prevalence of stablecoins. But I think the fundamental issue is whether this is going to catalyze every country to start innovating in terms of payments. India, in my view, is already very far ahead of most other countries, both advanced and emerging market countries, in terms of the efficiency of its payment systems thanks to the UPI. So I think India has somewhat less to fear in terms of domestic payments being disrupted, but certainly cross-border payments are going to be disrupted.
Yes, cross-border is very expensive. I mean, I think if I have to remit $100, we spend almost 5% in terms of cost of paying the banks on this side and that side. So clearly, cross-border is very, very inefficient and very profitable for the banking system. But if the Indian government, or any for that matter, you know, say Indonesian or Philippine, any of the Asian governments, advise or direct their citizens not to pay in stablecoins, then do you think the system will be thwarted or impacted in any way? Do you expect them to come up with such rules?
