Vrinda Rajoria is a 4th Year student at the Jindal Global Law School, O.P. Jindal Global University.
Introduction
The Guiding and Establishing National Innovation for U.S. Stablecoins Act (“Genius Act”), enacted on July 18, 2025, is arguably an extension of American economic influence into the realm of digital finance. To understand its implications, one must first appreciate the historical evolution of the U.S. dollar and its unique position in the present global economy. Following the collapse of the Bretton Woods system in 1971, in the aftermath of which the dollar was detached from gold due to President Nixon’s decision, nations around the world were compelled to hold reserves in a fiat currency no longer backed by a tangible asset.
This arrangement got its name from what economists call the “exorbitant privilege,” which allowed the U.S to operate without the usual constraints of external balance of payments pressures. Simply put, while other countries must carefully manage trade deficits and capital flows, the U.S. could issue debt at comparatively lower cost because the world demanded dollars for reserves and trade. The Genius Act is essentially digitizing this dollar advantage, with the U.S. aiming for the world to need U.S.-regulated digital dollars, giving it advantage in the crypto wagon.
At the heart of the GENIUS Act is the concept of Permitted Payment Stablecoins (“PPSIs”), which are essentially defined digital tokens designed to maintain a fixed value relative to the U.S. dollar on atleast one-to-one basis. This Act exempts PPSIs from being classified as securities or commodities under the SEC or CFTC. By doing this, the GENIUS Act encourages their adoption by institutional investors and fintech companies while ensuring that these assets remain under the purview of the GENIUS Act.
The Act mandates that PPSIs be fully backed by U.S. dollars (as mentioned above) or short-term treasury obligations, which ensures that each digital token represents an equivalent amount of government-issued value. Since PPSI issuers must hold U.S. Treasuries or dollars for backing, they become permanent buyers of U.S. government debt. The more PPSIs are issued (as global demand grows), the more U.S. Treasury bills are purchased and held. This full reserve requirement ensures that these private digital assets act as perpetual buyers of U.S. debt.
Fiscal Mechanics and Seigniorage
Seigniorage is the profit a government earns by issuing currency which is the difference between the face value of money and the cost to produce it. Normally, when the U.S. issues dollars, the government earns seigniorage. But when private firms issue PPSIs, they also earn income from holding the interest-bearing assets (like Treasuries) that back those tokens. The Act forbids PPSIs from paying any yield or interest to token holders. This prevents PPSIs from becoming investment products and keeps them strictly as payment instruments like digital cash.
As a result, all interest income earned from the Treasury securities backing the PPSIs goes to the issuer, not the token holder. This means regulated issuers (banks, fintechs, etc.) enjoy the seigniorage-like profit, not individuals. The U.S. government and regulated issuers control the flow of digital value, while users hold non-yielding assets that effectively act as “digital cash” financing U.S. debt behind the scenes.
Extraterritorial Overreach
Beyond fiscal mechanics, the GENIUS Act asserts extraterritorial jurisdiction as well. The Act explicitly classifies PPSI issuers and operators as “financial institutions” under the Bank Secrecy Act (“BSA”), which is the primary U.S. anti money laundering law, requiring comprehensive anti-money laundering programs, Know-Your-Customer verification, and ongoing sanctions compliance.
Another important point is that issuers of such stablecoins must be able to seize, freeze, or burn tokens in accordance with lawful orders. This capability allows U.S. authorities to enforce regulatory mandates on assets held by non-U.S. residents, including Indian citizens and entities, effectively extending U.S. jurisdiction to foreign soil. Unlike traditional banking sanctions, which rely on intermediary banks or cross-border cooperation, the GENIUS Act empowers regulators to act directly on digital assets themselves, creating a new vector for asserting control over global capital flows.
India’s Vulnerability to the Act
Reserve Bank of India has consistently cautioned against the adoption of dollar-pegged stablecoins, as it could lead to dollarization, a phenomenon under which the rupee’s role as a medium of exchange and store of value loses its significance and is replaced by the dollar. Dollarization would limit India’s ability to conduct independent monetary policy, as the central bank loses control over domestic liquidity, interest rates, and credit distribution.
The current legal position in India further complicates enforcement. Under the Foreign Exchange Management Act, 1999, several sections are relevant:
- Section 3 restricts dealing in foreign exchange without authorization from the RBI. In this case, if PPSIs are dollar-pegged, their use in India may be considered a foreign exchange transaction, requiring RBI approval.
- Section 6(3) limits capital account transactions that alter foreign asset positions unless specifically permitted. Using or holding stablecoins may count as a capital transaction, especially if it changes ownership of dollar-denominated assets.
- Section 13 prescribes civil penalties, and individuals or companies dealing in unapproved stablecoins could face penalties for unauthorized foreign exchange dealings.
- Section 3(b) of FEMA restricts residents from transferring money abroad except through authorized channels. Buying stablecoins in India for cross-border transfers would likely violate this law unless done through an RBI-regulated bank under the Liberalised Remittance Scheme (LRS).
From a clear legal standpoint, under FEMA, the RBI can restrict or penalize dealings in dollar-pegged stablecoins, but enforcement is difficult because these are decentralized digital assets often transacted via foreign platforms beyond Indian jurisdiction.
Taxation of Stablecoins in India
Under India’s current taxation regime, stablecoins are treated in the same as other Virtual Digital Assets (VDAs). The Finance Act, 2022, through Sections 115BBH and 194S of the Income Tax Act, imposes a 30% flat tax on gains from their transfer and a 1% TDS on transactions, regardless of whether the asset is a volatile cryptocurrency or a dollar-pegged stablecoin.
Although stablecoins such as USDT or USDC mirror the value of the U.S. dollar, they are not recognized as “foreign currency” under FEMA, making them taxable as assets rather than as currency. This creates an inconsistency, as stablecoins are taxable under the Income Tax Act but not permissible under FEMA, placing them in a grey zone where they are legally taxed but not formally recognized, and their transaction might even violate FEMA.
Steps Taken by India
This asymmetry leaves Indian monetary sovereignty exposed to extraterritorial influence, as capital transactions on domestic soil can be indirectly controlled by U.S. authorities. If Indian individuals or entities increasingly adopt dollar-pegged PPSIs in the absence of formal recognition or regulatory clarity under FEMA, these transactions could lead to an implicit transfer of U.S. debt obligations to India’s economic ecosystem. Indian users holding PPSIs essentially finance U.S. government debt without equivalent benefits flowing to the Indian economy, while India’s regulators struggle to control currency substitution or implement domestic monetary policy effectively. However, India’s currency ecosystem is not weak. There are some notable steps already taken which include:
- The e-Rupee (short for electronic Rupee) is India’s sovereign digital currency, issued and regulated by the RBI. It is essentially a Central Bank Digital Currency (CBDC), meaning it is legal tender just like physical cash, but exists in a fully digital form. It serves as an alternative to foreign stablecoins, which are private digital dollars controlled by the U.S. or private entities. As a sovereign currency, the e-Rupee remains under Indian jurisdiction and control. Unlike foreign stablecoins, which could “export” Indian savings to U.S. Treasuries, e-Rupee circulation keeps money within India.
- Another is UPI which is Unified Payments Interface, India’s real-time payment system that allows instant money transfers between bank accounts using smartphones. Now there is internationalisation of UPI, which means it can work with foreign payment networks, enabling cross-border transactions directly. For example, India’s UPI is linked to Singapore’s PayNow. An Indian business can pay a Singaporean supplier using UPI. A Singaporean citizen can pay an Indian freelancer using PayNow, which settles via UPI. These links bypass the need to use the U.S. dollar as an intermediary for many transactions.
Recommended Steps and Way Forward
In light of the growing influence of U.S.-regulated stablecoins under the GENIUS Act and India’s exposure to dollarization, India and other countries in the Global South need to adopt a clear and proactive approach. The following steps outline a strategic path forward specifically for India:
Firstly, India must consider an immediate clarification of FEMA and capital controls. The government should resolve the uncertainty regarding VDAs under FEMA and issue specific guidance classifying the conversion of rupees into foreign-pegged stablecoins, like those regulated under the GENIUS Act, as the legal equivalent of acquiring foreign currency liabilities. Such transactions must be subject to stringent capital control limits and strict reporting requirements to the RBI and ED.
Secondly, India should introduce sui generis legislation. The current strategy of regulatory ambivalence must be replaced by focused legislation that specifically regulates the entry, holding, and redemption of foreign-pegged stablecoins within India. This legislation must prioritize consumer protection and national financial integrity, enabling the Indian government to impose sovereign controls on these assets and neutralize the jurisdictional assertions of the GENIUS Act.
Thirdly, India should coordinate with the G20. It should continue to champion the adoption of CBDCs over private stablecoins within international policy forums and advocate for a global monetary framework that respects monetary sovereignty and prefers centralized, regulated solutions for cross-border payments.
Conclusion
In conclusion, the Genius Act represents digitization of American monetary power, aiming to anchor global finance to U.S. debt through stablecoins. While this poses significant risks of dollarization and extraterritorial overreach for India, it also underscores the urgent need for a response. By proactively clarifying FEMA provisions, enacting targeted legislation, and promoting sovereign alternatives like the e-Rupee and UPI, India can effectively safeguard its monetary autonomy.