How does Genius Act in US smartly convert the hype of de dollarisation to Digital dollarisation and how does it impact India?

Under Genius Act, Stablecoins in US are to be backed by USD Treasuries or Public Cash. This put the US Crypto market under Regulation. Issuers must peg their crypto with collateral.  How does it affect the Global Economy? Though it reduces the uncertainty of the currency and provides a value backed security to the holder, it has a smart economics that, for many people, are manipulating to overhaul the financial position of the US Economy.  Earlier, the economics was adhered to only two layered anchoring system i.e. USD and Gold. Now, cryptocurrencies are being used as currency for some countries and asset classes of the others, directs the currency market with another layer. From a layman’s perspective, If the demand for Stablecoins rises, then accordingly the demand for USD reserves which makes it stronger. But there’s more to the aspects of global economics.

To understand this let us know about history of Foreign Exchange:  Before Bretton woods system, the global economy was under the gold standard. The country which had more gold reserves was the richest because that was the underlying asset to derive the fundamental value of money. By the 2nd World War, America became the superpower by replacing the UK and Pound supremacy due to having largest reserves of Gold.  In Bretton woods system, there was a mutual agreement between 44 countries to accept dollar as the universal currency which was pegged with gold. This means, the other currency was then pegged with dollars, and not gold. The simple reason is that most of the countries lacked gold reserves, so to purchase gold, they required USD to pay to US. Indirectly, the value of domestic currency happened to be valued against the USD currency reserves they had. Basically, the rule got flipped. 

The supremacy got further strengthened by requirement of Funds for redevelopment of the countries including UK due to world wars and hence demand of US dollar was at peak. This debt was dollar denominated and hence it proved to the long-term viability of the currency. Further, US convinced the Gulf Counties to accept only USD to trade oil. This explains true value is derived through resource but accredited by whom it is controlled.  But when even US faced financial crisis, US printed money without considering its inability to maintain the Peg and unilaterally announced cancellation of gold pegging. This turned out to be a shock for the global economy because majority of the trades was denominated through dollar and they had no option to buy gold due to loss of convertibility. But US managed to rule by using its politics and military power despite growing interest towards de-dollarisation. Further, it had other advantages like Swift supremacy, connections in World bank and IMF, and an overall control over the global trade policies through sanctions. In current scenario, BRICS had been thinking to reduce dependence on USD and ensue acceptance of ally countries. 

Now let us understand the Indian context a bit to understand the overall scenario, India as a country requires foreign exchange for carrying out foreign trade. Market forces of currency are fundamentally derived based on the market forces of Goods/services but there’s another aspect to it. In India, there had been multiple devaluation of currency due to lack of funds to repay the loans. Though there’s a positive aspect to it if the country is productive. Devaluation makes import costly and enhance GDP but if it fails, the country falls into debt trap. Further, the currency depreciates due to lack of demand of this currency unlike Strong currencies like Pound or USD. This is the reason why Indian rupee has fallen since independence till now due to the ever-growing population, lack of resource and low productivity. India being managed floating exchange rate system has managed to balance the value to the extent it is able to control its monitory policy for curbing heavy fluctuations and instability. Growth is directly linked with productivity and relativity linked with foreign exchange rate, so it is always important to develop the productivity and acceptability in global market rather than playing calibrating the devaluation regulator. It can only become a calibrator and not the controller. So, it is important to look at value rather than denomination and valuation. 

Now let us understand the advent and impact of cryptocurrency in the global economy. Due to all these complication and manipulative aspects observed earlier, we realise that currency and exchange rate are so elastic with respect to factors other core value which makes the whole system so inefficient. Even when a central bank and financial instrument controls economy under supervision of a financial regulator, you are not 100% sure of what value you accumulate rather you are certified about that value by the government through its legal tendering. When a bank prints money, it cannot print free money. The reason has two wings. Whenever RBI wants to increase money supply to boost demand, it focuses on monetary policies strategically. Printing of money has another important angle which creation of assets under minimum reserve system. It must maintain gold and foreign reserves before it prints. We know examples of Venezuela which faced hyperinflation. This happened because it printed money more than it had assets, so it was nothing but pieces of paper having no real worth. This balance must be maintained so that it can be under equilibrium with the global market. So, whatever change we notice, is due to demand and supply and not because the countries’ domestic action which is healthier. So, cryptocurrency was introduced with the motive to eliminate the complications of fiscal, policy based, relationship based and geopolitical nuisances which create influence on currency and therefore, the main aim was to have a currency which will be only governed through market forces and not regulated by anyone. But it has a challenge, if market forces are to work efficiently, it must not have adoption issues. Therefore, it is still not a currency for most of the countries and just being seen as asset class even in India. The reason is whenever we attribute some value, it cannot be out of air and emotion. If it is so, the instability cannot be accelerated in the store of value. Suppose you received some crypto by selling a good by assuming its value and suddenly value of that cryptocurrency falls, so whatever value you have converted becomes worthless. This is the same difficulty that the barter system had faced. So, to become a currency, it must be a primary stable and acceptable to all countries. A currency cannot used for speculation. The general purpose of currency is to act as a medium of value and not the object itself. It must be a derivative of some real worth. While multiple countries have been thinking to regulate this and not ignore due to its importance and technological advantage. The motive is to distinguish between stablecoins and unstable coins. Crypto like Bitcoin are highly accepted but due to volatile nature, it is now being treated mostly as asset rather than a currency. Even the countries which are accepting these coins accept because of its tradability and as a source of value maximisation. Even India has categorised cryptos and Other digital assets as VDA and has made laws. Notably, India does not allow this cryptocurrency to be accepted as legal tender, and you must pay TDS to government with respect to payment you make to somebody for either purchasing VDA or paying in VDA. E Rupi issued by India is not a crypto as it is simply money in digital form. Hence, issue of e-Rupi simultaneously with Indian Rupee does not increase money supply. cryptocurrency has completely different way of working. Firstly, multiple cryptocurrencies have different way to maintain its liquidity, supply and the value it derives. It is non-regulated but highly influenced by factors, external or internal correlations. So, you must study each cryptocurrency separately before you can predict its growth and liquidity. There is a concept called Tokenomics to understand its supply. Again, it is prone to hacking and manipulation hence though it is under blockchain based decentralised platform, the problem lies with ethics which can’t be automated. This has really no solution other than risk management. So, unstable coins without any physical worth have no intrinsic value and just bets out of nothing. From economics aspect, stablecoins have future and can broaden the horizon of parallel economy through integration with existing form of economy. 

US took a big step towards to form this synergy by regulating the stablecoins through passing of Genius Act. Due to application of this Act, the issuers are limited to insured depository institutions. Stablecoin issuers must hold 1:1 reserves for any stablecoins issued. These reserves can be held in physical currency, US treasury bills, repurchase agreements and other low-risk assets approved by regulators. There were some views across the world regarding this. If the stablecoins fall and holders sell under panic, Treasury prices could collapse, sharply increasing interest rates and destabilizing other financial markets. The reason is stablecoin market is different from other crypto market or Equity market. It is more like money market; hence, the issuer has the obligation to redeem the money back by selling the backed-up treasury it owns.

Here comes the catch with the model, stablecoins issuers will be required to purchase the US Government debt and hence demand for its treasury will increase globally. It adjoins a new value without hampering the physical money supply just by linking the digital currency with treasury. This will first devalue the current holdings of stablecoins by other counties because it is now pegged against USD and further add value to USD. Further, the yield by issuer is agreed is around 4% interest yield which means if inflation runs 5%, effectively US pays lesser around 3.8%. So, smartly it channelises the money from outside, reduces finance cost, strengthens Dollar currency all at once.  As alleged by Anton Kobyakov, this is a smart move to shrink its 35 trillion Debt by devaluation. This simply means a strategic transfer of ownership of Debt. U.S. legislation encourages stablecoin issuers to buy U.S. bonds, which helps finance the government's deficit and, more importantly, moves a portion of the national debt to a new, decentralized group of global stablecoin holders. The second objective, which is purely speculative, is the act of devaluation. It is a separate, future event where the U.S. government would cause inflation to reduce the real value of the dollar. While the US National debt of $37.4 trillion would remain on the books, its real value what it can buy would shrink, effectively allowing the government to pay off a massive portion of its debt with cheaper money. The alleged genius of this plan is that it would allow the U.S. to reduce its debt burden without the politically and economically catastrophic consequences of a direct default on its major creditors.

How does it impact India?

The effects are primarily seen in three key areas: India's financial stability, its de-dollarization efforts, and its own regulatory response. A large-scale collapse of a major stablecoin issuer, as described in the Berkeley quote, could force a fire sale of U.S. Treasuries. This would cause interest rates to spike and trigger a global financial shock. Such a shock could affect India by Impact on Foreign Exchange Reserves - A sudden devaluation of the U.S. dollar, though highly unlikely, could reduce the real value of India's significant foreign exchange reserves, a large portion of which are held in U.S. dollar assets. A global crisis could cause foreign investors to pull capital out of emerging markets like India, putting downward pressure on the Indian Rupee and destabilizing financial markets. The U.S. strategy counters de dollarization efforts by creating a new source of demand for the U.S. dollar and U.S. debt. This strengthens the dollar's position as the world's reserve currency and undermines the stated goals of blocs like BRICS to create alternatives. Overall, while India's prudent regulatory approach provides a strong defence against the direct impacts of a U.S. stablecoin crisis, it remains exposed to the indirect effects of a global financial shock. Its cautious stance on de dollarization balances its desire for strategic autonomy with its deep economic ties to the U.S. financial system.