Stablecoins Emerge as Potential Hedge Against Geopolitical Volatility

Middle East Conflict Threatens India's Economic Interests: Can Stablecoins Provide a Lifeline?

The ongoing conflict in the Middle East is having a devastating impact on India's vital national economic interests. The country's reliance on traditional banking systems for international transactions makes it vulnerable to disruptions caused by war and conflict. In this article, we examine the potential role of stablecoins in providing stability in such extraordinary times, while also highlighting the risks associated with their adoption.

Impact on Diaspora Remittances

India has the largest diaspora working in the Middle East, with a majority of these workers being blue-collar individuals who support their families with periodic remittances. The country receives approximately $135 billion in remittances in FY 2024-25, making it one of the world's largest recipients of international remittances. However, the war in Iran puts this in peril, as most international transactions are currently settled through the 'SWIFT' network, which is plagued by issues such as delays in settlement timelines and high costs.

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The net impact of the war on a slowly evolving system may make timely and affordable remittances enormously difficult for the diaspora. The SWIFT network has taken various measures to facilitate frictionless and cost-efficient cross-border payments, such as SWIFT GPI and SWIFTGo, but these developments are slow and may not be ready at scale during an active geopolitical crisis.

Fallout on International Trade

India exports significant quantities of agricultural products, FMCG, pharmaceutical, chemical, and engineering goods to West Asia, and is also a major importer of oil, crucial for energy security. This cross-border trade relies on efficient settlement of dues, also carried out through international networks like SWIFT. However, these networks are vulnerable to total disruption arising from country-specific sanctions.

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In Iran, for instance, the US' sanctions have affected most bilateral trade with Iranian businesses and government undertakings for decades, in both goods and services. This has crippled the Iranian economy over time. While India has been largely insulated from foreign sanctions, its digital and financial sovereignty should never be vulnerable to the vagaries of geopolitics.

Alternative Tools: Asset-Backed Cryptocurrencies (Stablecoins)

Alternative tools, such as asset-backed cryptocurrencies (stablecoins) for cross-border transactions, could provide a useful hedge against this vulnerability. Because stablecoins are pegged to assets like fiat currencies, they are much more stable than even the most popular conventional cryptocurrencies like Bitcoin. In addition, the cost of transacting on a blockchain is also far lower than traditional financial systems like SWIFT.

Concerns Around Stablecoin Adoption

Notwithstanding these potential benefits of stablecoins at a time of geopolitical crisis, currently, an overwhelming majority of stablecoins are pegged to global currencies. This raises three key concerns.

1. Further Entrenchment of Non-Rupee Currencies: The risk of currency substitution has been one of the key reasons RBI has maintained its opposition to stablecoins. This risk is further pronounced when advanced economies like the US legitimize stablecoins amid the current geopolitical turmoil, trade disruptions, and capital re-allocations across jurisdictions.
2. Potential Ceding of RBI's Capital Control Measures: The end-use of non-rupee stablecoins may have to be limited to international payment settlements (remittances and B2B/trade) with no room for local retail transaction settlements.
3. Entrenchment of Advanced Currencies: The US has passed legislation to facilitate USD-tethered stablecoins, and another legislation to regulate other cryptocurrencies is underway – signaling the inevitable onslaught of USD-dominated stablecoins.

India's Regulatory Path Forward

The Government of India has tried to insulate itself by not recognizing such cryptocurrencies and is also trying to challenge their dominance by raising the domestic Central Bank Digital Currencies. However, this has not yielded major results, and in the face of the above factors, India risks being left a barren island in a world of regulated crypto asset frameworks. It is high time that the government proactively undertakes some pilot projects or sandbox experiments to understand the implications of legitimizing stablecoins in practice.