Regulation of Stablecoins in India and China

Stablecoins have seen their market capitalisation grow significantly, from €23 billion in early 2021 to just under €160 billion in the third quarter of 2024. Despite this impressive growth, they still only hold for less than 7% of the total crypto-asset market, which is valued at approximately $2.4 trillion. However, stablecoins have become a critical part of the crypto-asset ecosystem due to their frequent use in the trading of crypto-assets and as liquidity providers in DeFi. This fully applies specifically to the stablecoins dominating the market. Stablecoins emerged in 2014 as a response to the excessively high volatility of cryptocurrencies (BTC, ETH, and others) and the expanding crypto industry's need for a less volatile payment instrument.

Tether and USDC Total Market Capitalization

At the moment, there are more than 150 stablecoins. Three-quarters of the market capitalisation of stablecoins is accounted for by Tether (about $113 bn) and USDC (about $30 bn).

Stablecoin Classification

Experts classify stablecoins primarily based on the mechanisms they use to maintain value stability in relation to the asset or basket of assets to which they are linked.

According to this criterion, there are three types of stablecoins

• Secured stablecoins (e.g., USDT, USDC, DAI, PAXG): ensure the stability of value by allocating assets (in the form of bank deposits, precious metals, securities, and cryptocurrencies) to a separate balance sheet of the issuer.

• Unsecured algorithmic stablecoins (e.g., FRAX, FEI): do not involve securing liabilities with allocated assets.

• Hybrid stablecoins (e.g., IRON) combine secured and algorithmic mechanisms to maintain stable value relative to other assets.

Stablecoins Regulatory Framework in China

Stablecoins and cryptocurrencies are completely banned in China. In 2013, the People's Bank of China (PBoC) banned financial institutions from processing Bitcoin transactions. In 2017, the PBoC published the ‘Announcement on Preventing Financial Risks in Token Issuance’, prohibiting exchange transactions between stablecoins, cryptocurrency, and legal tender. In September 2021, the PBoC, together with other authorities including the Supreme People's Court, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission, issued the ‘Notice on Further Preventing and Addressing Speculative Risks of Virtual Currency Transactions’ (‘Notice 9.15’). This notice prohibits and suppresses illegal financial activities related to the currency, including illegal token sales, unauthorised public issuance of securities, illegal derivatives business, etc. According to the act, stablecoins and cryptocurrencies are not recognised as legal tender in China, commercial activities related to stablecoins and cryptocurrencies qualify as illegal financial activities, access to foreign platforms providing stablecoin and cryptocurrency services is subject to tracking and blocking, and financial institutions and payment service providers are prohibited from offering any services related to stablecoin and cryptocurrency transactions. In addition, a USDT caution notice has been issued calling for stricter measures for the use of stablecoins in cross-border payments.

Stablecoins Regulatory Framework in India

The Reserve Bank of India and the Government of India banned transactions in digital assets, including stablecoins, until 2020. However, in its judgment dated 4 March 2020, the Supreme Court quashed the Reserve Bank of India's notification to ban digital assets, after which Indian cryptocurrency exchanges and traders were able to resume their operations. In 2021, a bill was drafted to regulate crypto-assets in India, but it was never passed. The legislation amended the Companies Act 2013 to address reporting requirements for virtual digital assets, the Prevention of Money Laundering Act 2002 to cover transactions involving virtual digital assets, and tax legislation to include provisions related to income tax.

The Reserve Bank of India notes, however, that stablecoins can only be useful for use in cross-border transactions between several connected countries and pose a real threat to the political sovereignty of other countries.

According to Kar Yong Ang, a financial market analyst at Octa Broker, stablecoins can serve as an additional financial instrument to generate investment income. This can happen by increasing the value of the asset to which the stablecoins are linked or by hedging against risks. However, due to the lack of regulation in China and India, every crypto investors in these countries take on additional risks.