Crypto-currency,
Bitcoin and Facebook-backed, Libra could play a role in a world, where the
central banks have globally started to issue their own digital currencies. While
both have had their critics, Raghuram Rajan, former governor of the Reserve
Bank of India, said that the two digital currencies could have a place when
central banks enter the fray.
“I would like to think that these private
currencies are also in competition with the central bank digital currency”, Rajan
told the media. Digital currencies are likely to have big implications for the
role central banks and retail lenders play in the world and could change the
face of the entire financial system. While the idea is still being debated,
central banks would likely issue digital versions of fiat currencies. The
People’s Bank of China is already doing pilots, while other central banks are
considering whether to issue their own. Bitcoin is a “decentralized” crypto-currency
meaning it has no central authority governing its issuance, unlike fiat
currencies. It is built on so-called block-chain technology, which at its
simplest level, is an immutable public ledger of Bitcoin transactions. Bitcoin
has often been criticized as being a speculative asset. Legendary investor
Warren Buffett said earlier this year that it has “no value’.
Libra takes a more centralized approach.
It is a project that was proposed by a Facebook-led consortium of companies
last year. But Libra drew heavy criticism from regulators, particularly because
of its ties to Facebook and its murky track record of data privacy. The idea is
for Libra to be a so-called “stable coin” which would be backed by a basket of
global currencies. That would keep its value stable in contrast with the volatility
that has been seen in Bitcoin. Libra has scaled down some of its ambitions.
Earlier this year, the Libra Association applied to obtain approval from
regulators to issue a digital currency backed by one currency. That would mean
the consortium’s digital coin may be equivalent to a euro or a U.S. dollar, for
example.
Rajan said that Bitcoin is a “speculative
asset” rather than one that is used for transactions on a large scale. He said
investors have often flocked to Bitcoin when traditional assets such as bonds
are less attractive. Rajan said, “In that sense, Bitcoin is a little bit like
gold, in fact, gold has some value because we value it for jewelry, but Bitcoin
you can’t even do that. Nevertheless it has value because others think it has
value”.
“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”, he added. The former central banker said that having a private digital currency that had a “monopoly” would be “problematic”.