Trump’s Crypto Surge Poses Risk to India’s Rupee Sovereignty | Policy Circle

Donald Trump’s approach to cryptocurrency is compelling emerging economies to choose between their established monetary sovereignty and an influential digital dollar driven by political agendas.

Five months into his second term, President Donald Trump has taken significant steps beyond merely tweeting about Bitcoin. He has enacted two executive orders: one forming a President’s Working Group on Digital Assets, and another considering a strategic bitcoin reserve. Moreover, he turned a $10,000-a-plate dinner with supporters of the $TRUMP memecoin into a showcase of Oval Office policy actions. The message is clear: Washington aims to engage both the crypto electorate and the crypto lobby in equal measure.

The repercussions extend worldwide. Pakistan, precariously reliant on an IMF bailout, has signed a memorandum with World Liberty Financial, a company linked to the Trump family, to establish South Asia’s inaugural sovereign Bitcoin reserve. Islamabad aims to create a favorable impression on the White House, while critics fear the revival of past boom-and-bust episodes that resulted in capital flight and a desperate plea for aid.

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Alarm bells in Washington, Frankfurt—and Delhi

Concerns are mounting among experts. Gita Gopinath, First Deputy Managing Director of the IMF, warns that the unchecked growth of crypto assets in developing markets could disrupt banking systems, lead to dollarization of whole economies, and weaken already fragile tax foundations. European Central Bank President Christine Lagarde recently cautioned the International Monetary and Financial Committee that while stablecoins—tokens pegged to fiat currencies—“may appear benign at $200 billion, at $2 trillion they pose a risk of runs on the global financial system.”

The $2 trillion projection isn’t just alarmist. A bipartisan bill in the US Congress—the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act—would permit registered issuers to offer dollar-backed tokens as long as each coin is matched with a dollar or an extremely secure Treasury bill. Standard Chartered estimates the issuance of stablecoins could increase tenfold if this Act is enacted. Senator Elizabeth Warren has labeled the legislation “a gift to Wall Street disguised in fintech,” emphasizing that retail holders would lack Federal Deposit Insurance protection while issuers enjoy substantial profits.

For Pakistan, the stakes are high. While a Bitcoin reserve may garner attention from Trump, it also creates an opportunity for speculators: should the rupee falter, capital can flee via an app with ease. The central bank’s capacity to defend its currency—already limited by sparse reserves—could disappear in an instant. Crypto advocates term this as market discipline; economists see it as a formula for national default.

India’s in-between stance

India has chosen what might be described as a mixed approach—part acceptance, part rejection. Crypto gains are subject to a hefty 30% tax, every sale incurs a 1% tax deducted at the source, and exchange fees are liable for GST. Crypto intermediaries are categorized as “reporting entities” under the Prevention of Money-Laundering Act, meaning they must submit suspicious transaction reports akin to banks.

Yet, a comprehensive regulatory framework remains absent. In 2021, the Supreme Court overturned the Reserve Bank of India’s 2018 directive that prohibited banks from servicing crypto entities. Earlier this year, the Court likened Bitcoin trading to an “elegant form of hawala” and urged New Delhi to establish a definitive policy. RBI Governor Sanjay Malhotra echoes this concern, asserting that unregulated stablecoins could “undermine monetary sovereignty and financial stability.”

This leads to a regulatory void. High taxes are pushing some traders to Singapore or Dubai; oversight is inconsistent; and investors have limited avenues for legal recourse. An inter-ministerial group is in the process of drafting a discussion paper, but the global landscape is evolving faster than the committee can keep pace.

A five-point strategy for crypto regulation

In light of these developments, the pressing question arises: what strategic actions should New Delhi undertake to protect the rupee, ensure financial system stability, and still leave room for responsible innovation?

Licensing over prohibition: Comprehensive bans push activities underground or overseas, leaving regulators in the dark while failing to address demand.

Protect the rupee: Retail holdings of dollar-pegged stablecoins should be limited. Any rupee-linked token must retain full and high-quality reserves in supervised banks and undergo daily disclosure.

Implement the FATF “travel rule” across the board: Exchanges, wallet providers, and payment gateways should link know-your-customer data to each transaction so that illicit flows can be monitored in real-time.

Adopt the G20 roadmap that India itself helped formulate in 2023: Aligning domestic regulations with global standards will avert regulatory evasion and bolster confidence for foreign investors.

Expedite the retail e-rupee: A central-bank digital currency offers households a secure, cost-effective alternative while limiting the footprint of privately issued coins.

The implications for monetary sovereignty

The promise of cryptocurrency is substantial: lower remittance costs, programmable contracts, and a chance for financial inclusion. Yet, the associated risks are equally significant. If scaled, stablecoins could evolve into the new money-market funds of the shadow banking sector—yielding profits during good times while triggering bank-run dynamics during downturns.

President Trump’s wager is that by endorsing dollar-backed tokens, America can solidify the greenback’s supremacy well into the digital age. India must decide whether to create the regulations or be governed by the frameworks of others.

Regulation is not merely a formal process; it serves as a safeguard. The rupee, unlike a meme coin, secures the savings of 1.4 billion citizens. Before the worldwide surge of digital dollars intensifies, New Delhi needs to erect protective barriers. If the government hesitates, it may soon realize that the cost of regaining lost monetary authority far exceeds the investment in establishing prudent regulations today.

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