Reserve Bank of India (RBI) governor Raghuram Rajan spoke out on bitcoin at a televised event organised by the NDTV network late last week.
During the discussion, which looked at aspects of the Indian economy, the governor was asked for his opinion on bitcoin. He responded by saying that the digital currency is “fascinating”.
However, Rajan was also cautious about the risks of the new technology.
“I think we are still watching the evolution of these kinds of currencies,” he said. “One of the problems that we envisage with bitcoin is security issues. You’ve seen that it is not as secure as people thought they were and there have been stolen bitcoins and so on.”
“But the second issue is the fluctuation in value. For money you require a stable store of value. Something that fluctuates so much is less effective for use as money.”
Evolution of the technology
Rajan proceeded to conclude that there are some lessons to be learned from technologies employed in bitcoin.
“Some of them are useful, some of them are worrisome and we have to see how we take on such technologies,” he said. “I have no doubt that down the line we will be moving towards primarily a cashless society and we will have some kinds of currencies like this which will be at work.”
He argued that digital currencies will evolve to become better and safer in the future:
“Over time they will be a form of transaction, that’s for sure.”
Reserve bank acceptance?
Rajan also addressed another issue – the future of central banks in the era of digital money. When Dr Roy asked whether or not India will adopt digital currency at some, Rajan said digital currency will not be ruled out.
“We will never reject them out of hand,” said Rajan. “You know, in a sense credit cards are already performing some of that role.”
Rajan went on to say that the amount of cash used by consumers is far smaller than it was before the introduction of credit cards.
Intriguingly, he did not rule out the idea that a digital currency system could one day be embraced by central banks:
“For us as a reserve bank, this may happen maybe 10, 15 years from now, but we’ll have to figure out how we will make money. Because, you know, the way we generate most of our revenue is through forms of seigniorage.”
Rajan added that the bank wants to permit and promote development of new payment services and technologies such as Near Field Communications (NFC) and ‘tap-and-go’ transactions enabled by such technologies.
Cautious over bitcoin
In the past, Rajan has expressed scepticism and concern over the use and regulation of digital currency.
In February, he said the use of digital currency raised questions about how its value would be governed. He advised investors to exercise caution before using bitcoin as a means of exchange.
While he pointed out that digital currencies still need to evolve, Rajan argued that technology capable of reducing transaction costs is key to enabling local transactions that are at the heart of financial inclusion.
Rajan made these comments the same week the RBI was tasked with examining the legal and security ramifications of digital currencies. Previously, in December 2013, the bank issued a warning, outlining a number of risks associated with digital currency.
India flag composite via Shutterstock