In recent years, stablecoins have emerged as one of the most significant innovations in the digital asset ecosystem. A stablecoin is a digital token pegged to a stable asset such as fiat currencies or commodities like gold. By combining blockchain efficiency with the stability of the underlying asset, especially in fiat-backed models, stablecoins claim to enable faster, cheaper payments and e-commerce transactions.  Supporters argue that stablecoins offer a predictable underlying value and are therefore, relatively less volatile than other cryptocurrencies, making them a preferred mode of payment for cross-border settlements.

It is because of these qualities that stablecoins with sovereign backing are becoming popular in various jurisdictions and have gained legislative momentum. The United States of America (US) has passed landmark legislation in the form of the Guiding and Establishing National Innovation for US Stablecoins Act (“GENIUS Act”) to regulate stablecoins. Under the GENIUS Act, only approved ‘Permitted Payment Stablecoin Issuers’ (“PPSIs”) are allowed to issue stablecoins pegged to the United States Dollar (USD). Such stablecoins issued by the PPSIs are required to maintain a 1:1 ratio of the reserves backed by high quality liquid assets like the US currency and US Treasury Bills.  Similarly, Hong Kong enacted its Stablecoin Ordinance[1] which is effective from August 2025. Under this regime, the licensed issuers of fiat-referenced stablecoins are required to maintain high quality reserve assets pool free of any charge at least equal to the par value of the outstanding stablecoins in circulation.

Indian Regulatory Landscape

For more than a decade, there has been a regulatory vacuum in India with respect to the usage of cryptocurrencies. In 2013, the Reserve Bank of India (“RBI”) issued its official public advisory[2] which warned the users of the potential risks associated with the use of cryptocurrency including the concerns pertaining to security and consumer protection, volatility and possibility of money laundering among others.

In 2018, the RBI issued a decisive regulatory circular[3] wherein it prohibited banks and other financial institutions from aiding individuals or entities dealing in cryptocurrencies or any other form of virtual digital assets (“VDAs”). However, this circular was challenged before the Hon’ble Supreme Court of India in the case of Internet and Mobile Association of India v. Reserve Bank of India[4]. The apex court held that such blanket restriction was irrational, given that there was no empirical evidence of any actual harm. It pointed out that there was a need for a more practical and nuanced approach to regulate the use of cryptocurrencies and other VDAs in the country which would help in balancing the innovation with the risk management. However, rather than enacting a comprehensive regulation, the government issued a 30% (thirty percent) tax on gains from VDAs under Section 115BBH of the Income Tax Act, 1961, effective from April 1, 2022.

In 2017, an inter-ministerial committee was set up by the Ministry of Finance, to study the issues related to virtual currencies and propose specific actions to be taken in this matter. The committee published its report in February 2019 recommending implementation of law banning all private cryptocurrencies except the ones issued by the State.

Stablecoin- A currency?

As per the present foreign exchange framework, the treatment of stablecoins becomes a tricky factor thereby leading to ambiguity. They do not fall under the definition of ‘currency’ as provided under Section 2(h) of the Foreign Exchange Management Act, 1999 (“FEMA”) as they are neither currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes or credit cards nor have they have been notified by RBI as currency separately. Therefore, it is possible for the RBI to notify stablecoins as a currency if there is policy alignment.

Stablecoin- A security?

Further, stablecoins are often compared to investment instruments such as mutual funds and exchange-traded funds (ETFs). Both mutual funds and ETFs are recognized ‘securities’ under Section 2(h)(i) of the Securities Contracts (Regulation) Act, 1956[5]. However, stablecoins differ from both mutual funds and ETFs, because they do not represent a claim on a pool of securities or any market-traded index, instead, they are a direct representation of the underlying reserve asset. Thus, unlike mutual funds and ETFs, they fall into a regulatory vacuum.  Additionally, they do not fall under the definition of ‘security’ under Section 2 (za) of FEMA.  It is pertinent to note that the Income Tax Act, 1961 defined VDAs, which encompasses cryptocurrencies and stablecoins. This underlines the legislative intent to treat stablecoins distinctly from securities.

Recently, the Hon’ble Madras High Court in the case of Rhutikumari vs. Zanmai Labs Private Limited[6] has observed that ‘cryptocurrency’ is not a currency. However, it is a ‘property’, which is capable of being enjoyed and possessed (in a beneficial form) and is capable of being held in trust.

A critical issue for cross border transactions

FEMA distinguishes between current account transactions (payments for trade, remittances, services not creating assets/liabilities) and capital account transactions (those altering assets/liabilities in or outside India). Stablecoins create classification uncertainty, i.e. if treated as currency, they fall under current account rules; if viewed as investments or asset holdings, they trigger capital account restrictions under FEMA. Since the stablecoins do not clearly qualify as any instrument under FEMA, the need for a specific classification becomes crucial to eliminate the ambiguity and use stablecoins for cross-border transactions. It may be pointed out that despite regulatory uncertainties, India has an active investor base for cryptocurrencies, and such transactions now form a significant proportion of the total cross border remittances.

Policy direction for regulation

The debate around the regulation of stablecoin has gained momentum in the backdrop of global regulation. In India, the government should consider whether stablecoins can be used as a tool to strengthen the Indian Rupee. This would require a wider debate amongst all stakeholders. Indian regulators are now at a crossroad, and a choice will have to be made. Either we can continue with caution and impose a blanket ban on stablecoins, which may eventually disincentivize fintech innovation or we can develop a framework for regulation which is suitable to Indian requirements with required level of ring-fencing to preserve the traditional financial systems.

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The article is authored by:

Siddharth Suresh is a partner, and Prateek Kumar Singh is a senior associate at DSK Legal.

[1] https://www.elegislation.gov.hk/hk/2025/17!en

[2] https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30247

[3] https://www.rbi.org.in/commonman/English/Scripts/Notification.aspx?Id=2632

[4] Writ Petition (Civil) NO. 528 of 2018

[5] Securities include shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or a pooled investment vehicle or other body corporate.

[6] O.A.No.194 of 2025