Why Stablecoins Are Not ‘Stable Money’ — And Why Central Banks Remain Indispensable

At first glance, stablecoins appear deceptively simple. Imagine an exchange-traded fund (ETF) where an investor buys gold — say 10 or 100 grams — and the fund issues a digital token backed one-to-one by that gold. The token can then be traded instantly, across borders, without intermediaries. Give it a respectable name — a “stablecoin” — and the promise seems complete: price stability, universal acceptability, and technological efficiency.

But scratch beneath the surface, and the idea raises fundamental questions about money, trust, and the role of the state. History, monetary economics, and recent financial crises all point to the same conclusion: asset backing alone does not make a legitimate currency.

Why asset backing is not the same as monetary legitimacy

The assumption that a stablecoin becomes credible merely because it is backed by gold or the US dollar is deeply flawed. Central banks also hold gold and foreign exchange reserves, but that is not what gives their currency legitimacy. What matters is the sovereign guarantee and the institutional framework behind the currency.

India’s own experience offers a cautionary tale. In the 1980s, Mumbai faced an acute shortage of small-denomination coins. To keep buses running, the city’s transport utility issued tokens that could be used in lieu of 25 paise or 50 paise coins. Within days, revenues collapsed. The undertaking was paid in tokens that had no backing from the central bank and could not circulate outside the system. The experiment was quickly abandoned.

The lesson was clear: money works only when it is universally acceptable and backed by a trusted authority. Without that, substitutes quickly lose value.

Why private stablecoins cannot guarantee convertibility

Stablecoins today claim full backing — typically by the US dollar or dollar-equivalent assets. In theory, holders can convert them back into cash at any time. In practice, this promise rests entirely on trust in the issuer.

Issuers do not keep reserves idle. The underlying dollars or assets are invested to earn returns. If those investments lose value or become illiquid, the promise of one-to-one convertibility breaks down. Even dollar-backed stablecoins are exposed to valuation, liquidity, and counterparty risks. Gold-backed coins carry even greater volatility.

In the absence of strict regulatory oversight, users have no way of knowing:

* how reserves are invested,
* whether they are fully segregated,
* or whether redemption will hold during stress.

This opacity creates the conditions for contagion — precisely what monetary systems are meant to prevent.

Why speed and anonymity are the real attractions

If stablecoins are supposedly equivalent to dollars, why not just use dollars? The answer lies not in safety, but in convenience and opacity.

Stablecoins allow rapid transfers without relying on banking systems or networks like SWIFT. They are particularly attractive for crypto trading because they avoid traditional audit trails. For cross-border transfers involving large sums, this speed and discretion can be tempting.

However, with systems like UPI transforming domestic payments in India, the efficiency argument weakens further. What remains is not technological superiority, but the ability to bypass oversight.

The monetary policy problem no one talks about

The most serious issue is not investor risk, but macroeconomic stability. Modern monetary policy works because central banks control the dominant medium of exchange. Interest rates, liquidity operations, and regulatory tools influence how money flows through the economy.

If stablecoins function as parallel currencies, this control erodes. Monetary policy actions would affect only the regulated banking system, while large volumes of transactions shift to an unregulated digital ecosystem. Inflation management, credit transmission, and even currency management would become ineffective.

This is not a hypothetical concern. Allowing alternative currencies to proliferate would fragment the monetary system, rendering central banking tools blunt or irrelevant.

Why regulation alone cannot solve the problem

Some argue that regulation could make stablecoins safe. But regulation across borders is inherently limited. Stablecoins are designed to transcend jurisdictions, making supervision difficult even for advanced regulators.

In countries like India, where financial literacy remains uneven, consumer protection becomes even harder. Grievance redress mechanisms are unclear, enforcement is complex, and losses may be irreversible.

This is why central banks worldwide have drawn a clear line: private money cannot substitute sovereign currency.

The central bank’s unique role

A central bank-issued currency has credibility because it is legal tender, universally acceptable, and backed by the full faith of the state. It is also embedded in a regulatory framework that allows accountability, transparency, and crisis management.

Private issuers lack all three. They cannot guarantee value in stress, cannot ensure universal acceptance, and cannot act as lenders of last resort.

This is precisely why institutions like the “Reserve Bank of India” have consistently warned against cryptocurrencies and stablecoins, even as they explore central bank digital currencies (CBDCs) that preserve monetary sovereignty.

Why stablecoins remain fundamentally suspect

At their core, stablecoins solve a problem only if the problem is avoiding oversight. They do not improve monetary stability, financial inclusion, or economic efficiency in a way that existing or emerging public systems cannot.

Worse, they threaten to undermine monetary policy, encourage regulatory arbitrage, and expose economies to external shocks and contagion. In an interconnected financial system, such vulnerabilities are not private risks — they are systemic ones.

Money, trust, and the state

Money is not just a technological instrument; it is a social and institutional contract. That contract rests on trust in the issuing authority, not merely on asset backing.

History shows that when private substitutes challenge sovereign money, instability follows. Stablecoins, despite their name, repeat this old fallacy in digital form. Without central bank backing, they are not stable money — merely speculative instruments dressed up as currency.