Is UPI More GENIUS Than Stablecoin? | The Reason Why

Many economists considered cryptocurrencies a bubble that would burst one day. But the likes of Bitcoin have been around us, successfully guarding their fort for many years despite step-brotherly treatment from central banks and governments.

Over the past decade, we have watched the births and deaths of dozens of cryptocurrencies. That's one thing I appreciate about these currencies — the pure form of competition. Government regulation is so common that you hardly find a sector where market forces are in complete control of their fate. 

But governments have started interfering — through central bank digital currencies or regulating cryptocurrencies. A few months ago, President Donald Trump signed the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act), a decisive step towards formalising digital currency.

For years, stablecoins, a type of cryptocurrency, operated in a regulatory grey zone. The new law regulates stablecoins with rules like who can issue, what the checks and balances are, and so on. However, they are not replacing US dollars (yet). Stablecoins remain private digital instruments which can be exchanged for dollars. They don't enjoy the guarantees and protections of actual US dollars, like deposit insurance.

Due to this law, stablecoins can become a serious alternative to traditional bank wires, credit cards or SWIFT. With near-zero costs and 24/7 operations, businesses and people can now send international payments, use stablecoins for treasury management, settle global trades, or even pay salaries to freelancers residing abroad.

Not just that, now, companies like Amazon, Apple, and PayPal, or banks like JP Morgan, can issue their own stablecoins. However, all stablecoins are required to be fully backed by US dollars or Treasury bills at a 1:1 ratio, ensuring that each token is equivalent to one dollar.

Being backed by Treasuries doesn’t mean that users would earn interest on it. Instead, issuers, the banks and companies would pocket those coupon payments.

Then, inflation, rate spikes or a sudden drop in demand could force issuers to dump bonds during mass redemptions, destabilising markets. Even the largest stablecoins have slipped below $1 in stressful events earlier. In such cases, we cannot ignore risks of a run on stablecoins that could turn into a run on deposits, making the financial system more fragile.

With multiple stablecoin issuers, critics believe that we may see a repeat of the "wildcat banking" era (1837-65). Before the common US dollar, banks in the US used to issue their own private currencies — around 100 circulated during that period, triggering frequent bank failures.

Although stablecoins are touted as a global currency, the practicality of that depends on the other countries. They may limit or prohibit the use of stablecoins, making them redundant for some countries. 

And with top political offices excluded from ethics rules, the emergence of branded tokens like Trump’s USD1 stablecoin only adds to the complexity.

Cryptocurrencies were initially designed to eliminate central authority, challenging the government's role and offering an alternative, especially in struggling countries like Venezuela and Zimbabwe. I was more keen on that objective to see how it evolves.

However, after Covid, venture capitalists started seeking legitimacy, resulting in laws like the GENIUS Act. This shifts the objective and makes stablecoin just another payment method. It has also removed its original privacy and censorship-resistant benefits.

As original crypto principles — privacy, decentralisation and censorship resistance — are already compromised under the GENIUS Act, how are stablecoins any different from what traditional finance cannot achieve eventually?

All the excitement rests on an assumption that traditional financial infrastructure remains expensive and slow. But what if traditional finance catches up? Or what if India's Unified Payments Interface or payments bank architecture goes global, allowing instant, low-cost transfers from any bank account to another, anywhere in the world? In fact, the UPI is set to link with the European Union’s TARGET Instant Payment Settlement system, which will transform cross-border payments. 

In that scenario, the user experience of moving money via a global UPI app would be similar to that of stablecoins. I believe, for ordinary users, stablecoins don't feel any different from a regular digital payment. The difference is in the underlying technology and not the user experience, apart from the balance reflected in tokens vs currency.

The UPI is like a public railway track on which private trains, such as Google Pay or PhonePe, run under a common currency. Stablecoins under the GENIUS Act flip this model: instead of common rails, they create private tracks and even private versions of the dollar. That also shifts power from public institutions to corporations. So, in that way, a global UPI-like system might not only be simpler, but far more "genius".

The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.