Stablecoins are often described as the quieter corner of the crypto ecosystem. Unlike highly volatile crypto-assets, they are designed to hold a relatively stable value, typically by pegging to a fiat currency such as the US Dollar. That apparent stability, however, makes them legally more complex, not less. A stablecoin can function as a medium of exchange, a settlement instrument, a store of value, a bridge between fiat and crypto markets, or an infrastructure layer for decentralised finance. The legal question, then, is not simply whether a token qualifies as a crypto-asset, but something more fundamental: what exactly is being regulated the token, the issuer, the reserves backing it, or the activity carried out through it?
India currently has no standalone statutory framework governing stablecoins specifically. That does not mean stablecoin-related activity exists in a regulatory vacuum. Rather, the present position is a layered framework, where existing laws apply depending on the nature of the activity involved while core questions around issuance, reserves, redemption, and insolvency remain unanswered.
The Existing Regulatory Position
India's approach to crypto-assets has historically been cautious. The framework has developed through taxation, anti-money-laundering requirements, and existing financial-sector laws, rather than through a dedicated licensing regime for private crypto-assets.
Taxation. The inclusion of specified digital assets within the Virtual Digital Asset (VDA) tax framework recognises their economic existence, but this is not the same as granting them legal-tender status or authorising anyone to issue them.
Anti-money laundering. The more consequential layer for businesses dealing with stablecoins is the Prevention of Money Laundering Act, 2002 (PMLA). Specified VDA-related activities fall within the reporting-entity framework administered by the Financial Intelligence Unit–India (FIU-IND). Depending on the activity it undertakes, an entity dealing with stablecoins may be subject to KYC, customer due diligence, transaction monitoring, record-keeping, and suspicious-transaction-reporting obligations. FIU-IND's enforcement actions against VDA service providers confirm that registration and AML/CFT compliance are not merely theoretical requirements.
This makes how an activity is characterised critical. A stablecoin used by an exchange purely as a crypto-market settlement asset raises different regulatory questions from a token issued to facilitate retail payments or remittances. The analysis has to stay activity-specific rather than label-specific the same word "stablecoin" can describe very different regulatory exposures.
Not sovereign money. This distinction matters even more when a stablecoin is compared with sovereign currency. A privately issued dollar- or rupee-linked stablecoin does not become legal tender simply because it maintains a one-to-one peg. This is fundamentally different from India's Digital Rupee (e-₹), which is issued by the Reserve Bank of India and represents a direct liability of the central bank. The mechanism behind a privately issued stablecoin and the legal status of a central-bank digital currency are categorically different things.
RBI's Stance and Policy Context
The Reserve Bank of India has consistently expressed reservations about privately issued crypto-assets, citing concerns around monetary sovereignty, financial stability and capital-account management. While the central bank has not issued a stablecoin-specific prohibition, its public commentary has repeatedly distinguished the Digital Rupee a sovereign, RBI-backed instrument from privately issued tokens that merely track the value of a currency without carrying any sovereign guarantee. This policy backdrop matters for issuers and intermediaries alike: even where an activity is technically permissible under existing law, it operates within an environment where the regulator's institutional posture remains cautious, and where future rule-making could tighten rather than loosen the position taken on token issuance, custody and circulation.
Where the Regulatory Gap Becomes Significant
The real uncertainty begins once the analysis moves past the intermediary handling the stablecoin and looks at the stablecoin itself. India has no dedicated framework prescribing how a stablecoin issuer should operate no comprehensive regime governing minimum reserve requirements, reserve composition, independent verification, asset segregation, redemption rights, governance, disclosures, or what happens to token holders if the issuer becomes insolvent.
These are not academic questions. If an issuer represents that every token is backed by a corresponding reserve asset, the legal structure behind that promise becomes critical:
1. Who actually owns the reserve?
2. Where is it held, and is it segregated from the issuer's own assets?
3. Can a token holder demand redemption at par, on demand?
4. What happens if redemption is suspended, or the issuer becomes insolvent?
5. Most importantly what legally enforceable claim does a token holder actually have against the issuer or against the reserve itself?
This creates a meaningful gap between regulatory permissibility (whether an activity is allowed) and legal certainty (what rights the instrument itself actually carries). A business can fall squarely within an existing regulatory framework because of what it does with a stablecoin, while the legal rights attached to the stablecoin as an instrument remain undefined.
The payments dimension. India already has a well-developed regulated architecture for payment systems and instruments. But the fact that a stablecoin can be transferred between parties doesn't automatically make it a regulated payment instrument. Its treatment depends on the function it performs, who is issuing or facilitating it, and how value actually moves. The same underlying technology can therefore raise very different regulatory considerations depending on how it's used.
The Securities Law Question
A further layer of uncertainty arises if a stablecoin's structure begins to resemble an investment product rather than a pure payment or settlement token. Where reserve assets are pooled, professionally managed, and returns or profit-sharing arrangements are held out to token holders, the structure could start to resemble a collective investment scheme or another regulated instrument under securities law. India's securities regulator has not issued stablecoin-specific guidance, but the underlying test whether investors are contributing money to a common enterprise with an expectation of profit from the efforts of others does not depend on how the product is labelled. Issuers designing reserve and yield mechanics therefore need to assess not only AML and payments exposure, but also whether the structure inadvertently crosses into securities regulation.
Cross-Border and FEMA Exposure
Stablecoins are frequently used for cross-border remittances and trade settlement, which raises questions under the Foreign Exchange Management Act, 1999 (FEMA) independent of the PMLA analysis above. Where a stablecoin transaction effectively moves value across India's borders even without a corresponding banking-channel transfer it may implicate FEMA's provisions on current and capital account transactions, reporting obligations, and restrictions on certain categories of cross-border payments. The absence of a stablecoin-specific carve-out means that businesses facilitating such transfers must independently assess whether their activity falls within permitted current-account transactions, requires RBI approval as a capital-account transaction, or falls outside the framework altogether. This is a distinct compliance track from AML obligations, and one that is easy to overlook when the focus stays on FIU-IND registration alone.
The Regulatory Question Is the Mechanism, Not the Label
The word "stablecoin" itself can obscure the real risk. Stability can be achieved through fiat reserves, crypto-collateralisation, or algorithmic mechanisms and each creates a materially different risk profile. Reserve custody, liquidity, redemption mechanics, counterparty exposure, governance, technological failure, and market integrity cannot be assessed identically across these models; a fiat-backed stablecoin and an algorithmic one are simply not the same kind of risk.
This is where a future Indian framework will likely need an activity- and risk-based approach, addressing different concerns at different levels:
This is where a future Indian framework will likely need an activity- and risk-based approach, addressing different concerns at each level of the stack. At the issuer level, questions of licensing, governance, and capital and reserve requirements come first. At the level of the underlying asset, clarity is required on ownership and segregation of reserves, and on the legal rights a token holder actually has against them. At the customer level, the framework would need to address redemption rights, disclosure standards, complaint-handling mechanisms and protection in the event of an issuer's insolvency. And at the intermediary level where India's existing law already has the most to say AML/CFT obligations, KYC, transaction monitoring and applicable Travel Rule requirements remain central. None of these levels can substitute for the others: an intermediary can be fully compliant with FIU-IND registration while the token it handles carries no clear legal claim for the person holding it.
Lessons from Global Stablecoin Failures
The 2022 collapse of an algorithmically stabilised token, which wiped out tens of billions of dollars in value within days, is a useful illustration of why the underlying mechanism matters more than the reassuring label of "stability." Fiat-collateralised stablecoins carry counterparty and custody risk tied to the quality and liquidity of their reserves; crypto-collateralised models carry the risk of collateral volatility and liquidation cascades; algorithmic models carry the risk that the peg itself depends on continued market confidence rather than any redeemable asset. A regulatory framework that treats all three as interchangeable, simply because they share the word "stablecoin," would miss the risks each model actually presents.
The broader policy question, then, isn't simply whether stablecoins should be permitted or prohibited it's under what conditions a privately issued digital token should be allowed to perform functions that increasingly resemble money, payments, or settlement infrastructure.
Conclusion
As stablecoins increasingly intersect with payments, tokenised assets, decentralised finance, and cross-border settlement, legal assessment has to begin well before the point of regulatory scrutiny. The structure of the token, the rights attached to it, the source and treatment of its reserves, the role of each intermediary, and how value actually moves all of this needs to be evaluated together before the product goes to market.
Fathom Legal assists crypto, fintech, and digital-asset businesses in navigating this evolving landscape through regulatory structuring, VDA and PMLA assessments, AML/CFT advisory, token-model and reserve-structure reviews, cross-border regulatory analysis, and legal risk mapping. Our approach is to assess the technology and the proposed business model together, identify the regulatory touchpoints, and help businesses structure their operations with greater legal clarity.
Ultimately, India's stablecoin framework is still taking shape. Until a dedicated regime emerges, the absence of specific legislation does not eliminate regulatory exposure it makes careful legal structuring and activity-based analysis all the more important.