In 2019, you led a committee that recommended banning cryptocurrencies. Your main objection is that cryptocurrencies are not backed by a government?
Any currency represents a kind of purchasing power. It has to be issued by a relevant authority and tightly controlled. If a private individual issues a currency tomorrow, it will have no value. Likewise, if cryptocurrency is used as currency, you are usurping a value for private gain. The issuer of a cryptocurrency gets a valuable currency — rupee, dollar, etc — but the buyers get unofficial, speculative, risky, valueless currency. That has to be avoided. You can’t allow private currency in digital or crypto form.
But can we afford to ignore cryptocurrency?
When everything is getting digitised, currency should too. The day is not far when digital currency will come into being. But cryptocurrency is not the only option. Blockchain is one, the other is demat currency or database currency.
In demat currency, the old structure and problems remain. Cost of transferring money is expensive. Cryptocurrencies allow a better transfer system.
This is a good question. In fact, cryptocurrencies were born out of a desire to make international payments for goods and services frictionless and costless. The Unified Payments Interface — which the government, central bank and NPCI brought about — is a frictionless, instantaneous transfer system that is virtually costless. So you don’t need a cryptocurrency for domestic money transfers. International transfers require similar integration of databases. Suppose there is a super NPCI that can bring Indian banks and, say, banks in West Asia together. You don’t need cryptocurrencies for that either. What you need is to create an integrated digital database. So cryptocurrencies are not the answer for that. In fact, these are not being used for payments but as an asset, an investment vehicle. That is why we suggested that cryptocurrencies are crypto assets. You can securitise commodities. But there is no case for these as currencies.
So you believe its risks are far more than the benefits?
It is all risk and no benefit, or very little benefit.
Would monetary policy could go out of the government’s hands if cryptocurrencies are allowed?
A monetary authority maintains the value of currency by controlling the issuance. RBI does not issue currency haphazardly, but in a well-calibrated way. The moment a private party can issue a currency, monetary policy goes for a toss.
But if cryptocurrency is pegged to,say, the Indian rupee, it will become valid.
Facebook said we will come up with a cryptocurrency, Libra, whose value will be maintained in terms of the global currency basket. It has not been able to issue it for over a year now. Libra’s value will have to change only according to the basket’s value else people will lose faith in it. The issuing entity will have to manage the value by buying more dollars at the market rate. It will be very costly. If Facebook charges money to cover its losses, then it takes away the potential advantage of costless transfers. A few years ago, there were over 6,000 cryptocurrencies. Today, there are over 2,000. 75% of the value of those is only in Bitcoin. That is why cryptocurrencies have no future. These are entirely useless products.
But a lot of money is going into cryptocurrencies? Some people see it as a hedge against inflation.
It is speculative. It has no connection with inflation. The cryptocurrency balloon is going to burst. I don’t think it will last more than five years. What it will leave behind is good momentum for Blockchain technology, which is useful for certain transactions — like foreign trade, settlement, cheque settlement among bankers. Cryptocurrency is a nine days’ wonder.