RBI to come out with considered view on bitcoin, says Rajan

Bitcoin is a virtual currency, or crypto-currency, used only for online transactions

Reserve Bank of India (RBI) Governor Raghuram Rajan on Wednesday said the central bank was trying to understand virtual currencies in a better manner, adding RBI would “come out with a more considered view on it”.

In December 2013, RBI had raised a red flag against virtual currency bitcoin.

Speaking on the sidelines of the annual Nasscom Leadership Forum on Wednesday, Rajan said RBI had brought out a cautionary advisory, explaining some concerns for investors or users of bitcoins should have, without in any way saying anything about the future course of action.

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”.

Bitcoin is a virtual currency, or crypto-currency, used for online transactions alone. Though not backed by any central bank in the world, the currency is traded on a number of exchanges or swapped privately.

One of the values of a currency is some stability, said Rajan.“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.” Rajan added that it’s a question whether it 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.

However, Rajan said that it is pertinent to understand the role of virtual currencies and how they will interact with paper currencies. “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,” he questioned.

The RBI advisory has 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. People’s Bank of China had said it wasn’t a currency with “real meaning” and did not have the same legal status. RBI, stand too, seemed on similar lines.

“I don't want to say that there is no future for these virtual currencies,” Rajan said. 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.