The global race to adopt stablecoins could introduce fresh volatility and systemic risks unless accompanied by strong regulation, Erik Berglof, chief economist at the Asian Infrastructure Investment Bank (AIIB), has said.
Speaking to Moneycontrol on the sidelines of the Kautilya Economic Conclave in New Delhi on October 5, Berglof said the push for stablecoin adoption is “coming too fast and in too fragmented a way”.
“We are still far from having an architecture that ensures stablecoins are safe and not abused,” Berglof said. “There are so many risks and possibilities for abuse that I’m quite concerned the push now being made will create more volatility in the system and risks that we’re not set up to handle.”
Stablecoins are cryptocurrencies designed to maintain a stable value relative to a specific asset, typically a fiat currency, a commodity or even other cryptocurrencies. Unlike cryptocurrencies, stablecoins are protected from the volatility.
While the emergence of stablecoins is “unavoidable,” the lack of a coordinated framework leaves economies vulnerable to financial instability and policy erosion, Berglof said.
“If we don’t find a way of regulating them and ensuring they’re not used for illicit transactions or for undermining monetary policy, we have a problem,” he said. “The current momentum seems driven by interests not grounded in serious economic analysis.”
On October 3, finance minister Nirmala Sitharaman said nations must prepare to deal with stablecoins.
India and trade integration
Turning to India, Berglof said joining a major multilateral agreement such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) would be a “historic inflection point”.
“If India were to join CPTPP, that would be truly transformational,” he said. “It would open up many of the issues that are currently challenges —trade integration, state reform, inclusivity, and long-term sustainability. Even if, in the end, India didn’t join, going through the thought process could be very beneficial.”
CPTPP membership could help India address inefficiencies in its state sector and accelerate market reforms.
“We’ve done a study of the green transition in India — one of the main obstacles that has to be addressed is that the state sector, including state-owned enterprises and financial institutions, are still very much overinvested in fossil fuels,” he said.
CPTPP is a multilateral free trade agreement that eliminates tariffs and promotes market access among 12 member countries in the Indo-Pacific and beyond. Australia, Canada, Japan, Mexico, New Zealand, Singapore, Vietnam, Brunei, Chile, Malaysia, Peru, and the United Kingdom are its member nations.
Climate finance and inclusion
Berglof said AIIB’s plans to launch climate policy-based lending in India, similar to its programmes in Bangladesh and Brazil.
“We would like to connect nature, climate, and health—looking at carbon footprints of the health sector, resilience of facilities, and air pollution,” he said.
He also underscored that India’s vision of Viksit Bharat — a developed India — must be anchored in inclusive growth.
“No one should be left behind,” Berglof said. “Large groups being left behind undermines political support for reforms. Integrating women more into the economy may be the single most important step that could help India grow faster.”
Trade uncertainty hurts investment
Persistent uncertainty over global trade policies continues to dampen investment sentiment worldwide.
“These uncertainties are extremely bad for everyone, because if you want to get investment and trade going, uncertainty just undermines that,” he said.
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