Stablecoins

GS3 – Indian Economy

Context:

The U.S. Senate has recently passed the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins), providing regulatory clarity and momentum for the growth of stablecoins in the digital financial space.

What are Stablecoins?

• Definition:
  Stablecoins are a category of cryptocurrency designed to maintain a stable value by pegging their price to another asset, such as:
  • Fiat currencies (e.g., USD, INR)
  • Commodities (e.g., gold)
• Purpose:
  They aim to reduce the price volatility commonly associated with cryptocurrencies like Bitcoin, making them more suitable for:
  • Everyday transactions
  • Cross-border payments
  • Saving and remittances

What is Fiat Currency?

• Fiat currency is a government-issued currency not backed by physical commodities like gold or silver.
• Its value is derived from trust in the issuing government (e.g., Indian Rupee, US Dollar).

Types of Stablecoins

Type	Description	Key Feature
1. Fiat-Collateralized Stablecoins	Backed by reserves of traditional currencies (like USD) held by the issuing entity.	1:1 pegging to fiat currency, supported by real-world assets.
2. Crypto-Backed Stablecoins	Backed by other cryptocurrencies (like Ethereum or Bitcoin) held as collateral.	Over-collateralization is often used to mitigate volatility risk.
3. Non-Collateralized (Algorithmic) Stablecoins	Not backed by any asset; rely on algorithms and smart contracts to control supply and demand.	Aim to maintain price stability using market-driven mechanisms.

 

Significance of the GENIUS Act (U.S.)

• Provides regulatory support and legal clarity for stablecoins.
• Encourages financial innovation while addressing risks like money laundering and systemic threats.
• Signals growing acceptance of stablecoins as legitimate tools for digital payments and finance.