Raghuram Rajan urges caution on central bank digital currencies

Mr. Rajan’s remarks assume significance as the Reserve Bank of India has announced plans to progressively move towards introducing a digital currency.


Former Reserve Bank of India Governor Raghuram Rajan has urged central banks to be cautious about launching their own digital currencies, indicating it could lead to poorer choices for consumers and deter private sector innovations.

“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,” Mr. Rajan said on Thursday, at a session on the Future of Capitalism hosted by The University of Chicago Booth School of Business.

“We have to be careful because when the State authority takes up all that, it has an unfair advantage and it also may not do it very well. Think of you having a deposit with the Federal Reserve. How much customer service will you get on that?” he pointed out.

“If we introduce them, as central bankers, we have to be very careful we don’t snuff out the private sector, because the private sector has been very innovative So I would say we have to be very careful about displacing activity with the central bank digital currency,” he explained.

Mr. Rajan’s remarks assume significance as the Reserve Bank of India has announced plans to progressively move towards introducing a digital currency.

The former RBI governor, who is now a professor of finance at the Booth School of Business, also stressed on the nuance that the digital currency could be deployed differently in democracies and countries that were not democracies, citing the example of China which has made it illegal to mine, hold or trade in bitcoins.

“The idea behind the Chinese central bank digital currency is precisely to crowd out Ant Financial and Tencent, at least to some extent. That’s where again, I think there may be a difference between how some of the democracies are thinking of CBDC,” he concluded.

On cryptocurrencies, Mr. Rajan said that a killer app is yet to be found but there is value in letting those technologies flourish.

“I think these technologies can have a lot of value in certain situations where there is little trust or it is impossible to get that trust in a short period of time. So cross border transactions, a lot of them could be, and are being accomplished using crypto in some form,” he noted.

Transactions involving payment against delivery can also be carried out through smart contracts without the need for a variety of intermediaries, he said, listing out other possibilities for deploying crypto currencies and blockchain technologies.

However, he emphasised that he didn’t buy the central idea behind crypto currencies like bitcoins that ‘the world is engaged in a race to the bottom’ on devaluing currencies.

“I do worry to an extent about the way in which we have accommodative policies but I don’t think the US is out there trying very hard to run the dollar down to zero,” he said.

Mr. Rajan also expressed reservations about the value of cryptocurrencies hinging on their ability to facilitate payments.

“With cryptocurrencies, you have to ask what is their value… and often, the value seems to be ‘Oh… this will take over the world and all the payments will be done with this.’ If you have enough competition, payments are not a really competitive thing to do. It’s not clear to me this is going to hold up the value of crypto with so many competing forces,” he concluded.

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