A former governor of the Reserve Bank of India has said that he believes private digital currencies such as Facebook’s Libra should be allowed to compete with central bank digital currencies—and warned it would be “problematic” if any single asset establishes a monopoly.
Raghuram Rajan, who also previously served as the International Monetary Fund’s chief economist, said tech giants could wield a “tremendous amount of power” should their digital currencies secure a dominant market share. However, he also said safeguards are required to ensure that CBDCs don’t become too powerful either.
Speaking to CNBC’s Beyond The Valley podcast, Rajan said: “You get a lot of data. Cash transactions are anonymous […] nobody knows who you give your cash to. With a digital currency, I know precisely who you gave it to.”
He added: “The reality is that there’s a lot of data that’s going to be generated by the digital currencies which can be used for the good or the bad. And therefore, some competition is useful.”
Libra versus Bitcoin
Should it ever launch, and it is worth remembering that the project has experienced sizeable delays, some crypto pundits have openly pondered whether Libra could end up killing off Bitcoin—not least because of how Facebook will be able to promote its stablecoin to many billions of users. Likewise, some central banks are quietly hopeful that they will be able to kill off Libra by launching their own digital assets, and preventing the monetary sovereignty of their currency from being undermined. China’s digital yuan is among the more advanced initiatives. It is currently being put through its paces in extensive trials throughout the country, including Beijing.
But Rajan expressed confidence that Bitcoin, Libra, and CBDCs could all co-exist, given how they each bring something different to the table. “[Bitcoin] seems to be a speculative asset, rather than an asset that is used for transactions in such a big way. The cost of doing transactions on Bitcoin, the time it takes is quite high. […] Some of the benefits of digital transacting in the future, which is doing micropayments, doing many payments… those are not likely to be easy using Bitcoin.”
The Indian economist, who now serves as a professor of finance at the University of Chicago Booth School of Business, added: “On the other hand, Libra is an attempt to create a currency which is used for transacting. And that, the whole idea is not to hold it as a speculative asset which increases in value… but use it for transactions. So the ultimate underlying value is going to be from the central banks, they’re going to preserve the value, not of Libra but of what Libra can be exchanged into.”
Why are central banks so nervous?
Rajan’s perspective is likely to be refreshing to crypto enthusiasts who are accustomed to hearing from central bank executives—past and present—who are extremely skeptical about cryptocurrencies. Especially so given that he used to be the governor of the Reserve Bank of India, which had pushed through a de facto ban on private cryptocurrencies, later overturned by the Supreme Court. Earlier this month, India’s crypto industry was dealt a fresh blow when it emerged that the government is considering a legislative ban.
Facebook was by no means prepared for the extremely negative reaction it received to its Libra white paper, with American politicians publicly warning that it could pose a threat to national security and even destabilize the global economy. Regulators in Europe weren’t enthusiastic, either. When Rajan was asked why central banks opposed the stablecoin so vehemently, he replied: “I think the worry with Libra was that, in its early forms, it was on the one hand very ambitious in what it wanted to do, but very vague in what the safety precautions would be. And that worries central bankers tremendously—here is somebody who’s trying to become a world currency, which might displace a number of currencies across the world, especially the smaller ones.”
Rajan acknowledged that Facebook has sought to offer greater clarity about its plans for Libra, all while scaling back its ambitions. It has also aggressively pushed the idea that it has ceded control over the stablecoin to the Libra Association. However, he warned that the social network will continue to face challenges because of past scandals that have dented the tech giant’s image. “There is a certain amount of trust building that has to take place before it has all the doors open to it on the financial side. Central bankers will be very, very careful about opening doors before they’re confident,” he added.