NEW DELHI: Former RBI Governor Raghuram Rajan has encouraged central banks to be cautious about creating their own digital currencies, warning that it could lead to fewer options for consumers and stifle private-sector innovation.
Mr. Rajan said on Thursday at a session on the Future of Capitalism hosted by The University of Chicago Booth School of Business, “The problem with a central bank digital currency that is not well designed is that it hoovers up all the data and essentially provides competition to even traditional private sector activity.”
“We must be cautious because if the state takes on all of this, it will have an unfair advantage and may not do so well. Consider having a bank account with the Federal Reserve. He remarked, “How much customer service will you get on that?”
“As central bankers, we must be extremely careful not to suffocate the private sector if we introduce them, since the private sector has been so innovative.” So I’d say we have to be very careful about using the central bank’s digital currency to replace activity,” he explained.
Mr. Rajan’s comments are significant because the Reserve Bank of India has stated that it intends to gradually introduce a digital currency. The former RBI governor, who is now a professor of finance at the University of Chicago’s Booth School of Business, also stressed the nuance that the digital currency could be used differently in democracies and non-democracies, citing China as an example, which has made mining, holding, and trading in bitcoins illegal.
“The goal of the Chinese central bank’s digital currency is to suffocate Ant Financial and Tencent, at least in part. Again, I believe there may be a difference in how different democracies view CBDC,” he said.
Mr. Rajan stated that while a killer product for cryptocurrencies has yet to be discovered, there is merit in allowing these technologies to grow. “I believe these technologies can be extremely useful in instances where there is a lack of trust or where gaining trust in a short amount of time is hard. So a lot of cross-border transactions may and are being done utilizing crypto in some form,” he explained.
Smart contracts can also be used to conduct payment-on-delivery transactions without the use of a variety of intermediaries. There are a lot of alternative ways to use crypto currency and blockchain technology, he said.
He did say, though, that the primary notion underlying crypto currencies like bitcoins, that “the world is engaged in a race to the bottom” on weakening currencies, was not one he believed in.
“I am concerned about the way we have accommodative policies,” he added, “but I don’t believe the US is out there trying to drive the dollar to zero.” Mr. Rajan also expressed worries about cryptocurrencies’ value, which is based on their ability to enable payments.
Payments are not a very competitive thing to do if there is enough competition. With so many conflicting factors, I’m not sure this is going to hold up the value of crypto,” he said.