The global fascination with cryptocurrencies shows no signs of fading, especially with recent regulatory moves like the US GENIUS Act of July 2025. Yet, a critical question remains unanswered for investors and policymakers in India: Are digital assets like Bitcoin and stablecoins a genuine financial innovation or a speculative threat to economic stability? Nobel Prize-winning economist Jean Tirole provides a stark analysis, warning of significant risks that could impact emerging markets like India.
The Pure Bubble of Unbacked Cryptocurrencies
According to Tirole, Bitcoin stands as the prime example of an unbacked cryptocurrency with zero intrinsic value. Its market price represents what economists term a "pure bubble"—it holds value only as long as investor confidence persists and will collapse if that faith evaporates. While some compare it to gold, which has traded above its fundamental value for centuries, history is littered with bubbles that ended in ruin, from the 1630s Dutch tulip mania to modern real-estate crashes.
The social cost of such speculative assets is high. Unlike productive investments in technology or healthcare, crypto speculation creates minimal public benefit. It diverts seigniorage—the profit from creating money—from the public to private issuers. Furthermore, the energy-intensive "mining" process wastes vast resources. Cryptocurrencies are also notorious for facilitating tax evasion, money laundering, and illicit finance, with their global reach lowering barriers for financial crimes.
Stablecoins: A Flawed Promise of Safety?
Stablecoins emerged as a solution to crypto's wild volatility, pegging their value to assets like the US dollar. However, Tirole argues that financial history is replete with "safe" innovations, like mortgage derivatives, that sowed the seeds of crisis. Proponents claim stablecoins are fully backed by cash or Treasuries and regularly audited, but recent episodes challenge this.
Tether, the largest stablecoin, was fined for misrepresenting its reserves, while Circle, issuer of USDC, had 8% of its reserves trapped in the failed Silicon Valley Bank in 2023, requiring a public bailout. The GENIUS Act, while forbidding issuers from paying interest, leaves a loophole allowing platforms to operate like shadow banks without corresponding capital standards. This creates systemic risk; a small doubt about reserves could trigger a massive run, similar to the 2008 money-market fund crisis.
The Future of Money and India's Digital Advantage
The debate ultimately points to the future of money itself. Stablecoins reveal a demand for faster, cheaper, and programmable payments. The competition now involves three models: decentralized crypto, private corporate currencies (like the defunct Libra), and state-backed digital money. Here, India holds a significant advantage with its highly successful Unified Payments Interface (UPI) and ongoing exploration of a Central Bank Digital Currency (CBDC).
Tirole warns that the proposed US Digital Asset Market Clarity Act could handcuff the Federal Reserve, sidelining public money in favor of private issuers. In contrast, central bank-backed digital currencies, if designed well, can offer inclusive, low-cost transactions while ensuring privacy and financial stability. India's UPI is already a global benchmark for public-private partnership in digital payments.
The core principle, the economist concludes, is that finance must serve society, not the other way around. Innovation should enhance economic fundamentals, not erode them. For India, the path forward lies in strengthening its own robust digital public infrastructure, containing speculative crypto risks, and ensuring that the digital age of money becomes a source of progress, not peril.
