Rajan hedges bets on Bitcoin, doubts its stability

As a follow-up to the Reserve Bank of India (RBI)'s stance opposing the virtual currency 'Bitcoin' in December last year, its governor Raghuram Rajan on Wednesday said the apex bank is currently understanding virtual currencies better and will “come out with a more considered view on it”.

Speaking on the sidelines of the annual Nasscom Leadership Forum here, Rajan said that one of the values of a currency is providing stability. “As a currency, I do worry a little bit when the underlying (Bitcoin) fluctuates tremendously… and, to the extent that a currency is a target of speculation as opposed to primarily a means of exchange, it does create some concerns for the user.” He added that it is a question whether Bitcoins will "retain the same value tomorrow as it has today and it that sense Bitcoin has a more diminished value as a means of exchange than something more stable".

It is pertinent to understand the role of virtual currencies and how they will interact with paper currencies, Rajan said, adding, “Who gets the benefit of seniorage that's an important question for governments? But also, who will maintain value — can we have confidence in an unseen, unknown centre, which will maintain the value of the currency or an algorithm which will maintain the value of the currency?”

At the same time, he said, “I don't want to say that there is no future for these virtual currencies.”  He added that it is a “process of evolution” but for now RBI has just expressed the concerns it has without determining the way forward.

Earlier, RBI had issued a note cautioning users, holders and traders of such currencies against the “potential financial, operational, legal, customer protection and security-related risks they are exposing themselves to”.
 
Rajan said RBI had put out a cautionary advisory explaining some of the concerns that investors or users of Bitcoins should have without saying anything about the central bank’s future course of action.

The RBI advisory had come within days of China barring financial institutions from handling Bitcoin transactions — a move to regulate the virtual currency after an 89-fold jump in its value sparked investor interest in the country.

Bitcoin is a virtual or crypto-currency used only for online transactions, but not backed by any central bank.