Don’t dismiss stablecoins as useless—they tell us something that fiat money cannot

The Reserve Bank of India’s deputy governor T. Rabi Sankar recently responded to a question at a Mint conference on whether stablecoins have a role in the financial system by saying they serve no purpose that fiat money cannot serve. We respectfully disagree.

Stablecoins do serve a role within today’s fiat-money system—not by replacing it, but by placing a wrapper of imagined stability over it.That this wrapper is thin need not concern us for the moment. Demand for ‘stability’ allows us to picture an alternative world of finance. Fiat currencies, backed by nothing more than the word (‘IOU’) of a nation-state, have always embodied a power asymmetry.

The history of nation-states and empires is littered with examples of sovereign defaults on obligations or currency debasement, often via hyperinflation. Fiat currencies, and even their gold-backed predecessors, have always been prone to bouts of instability.The uncertainty stoked by such episodes tends to generate demand for alternatives that creates its own supply. Take the global financial crisis of 2008-09.

At its core, a risk-build-up was driven by demand for stable AAA-rated securities, which was met through financially engineered debt products. Mortgages issued to ‘Ninja’ borrowers (with no income, jobs or assets) in the US were repackaged into collateralized debt obligations and magically labelled as low-risk instruments. Some of this demand arose from overseas investors looking to park huge sums in US assets that would secure them from the volatility of their own sovereign currencies.

Ironically, their search for safety ultimately undermined safety itself. The subsequent collapse gave rise to another financial ‘innovation’: cryptocurrencies. These promised freedom