In this photo illustration, a visual representation of a cryptocurrency sits on display in front of a Facebook logo.
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Cryptocurrency bitcoin and Facebook-backed Libra could play a role in a world where central banks globally begin to issue their own digital currencies, a former top central banker told CNBC’s “Beyond the Valley” podcast.
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 CNBC’s “Beyond the Valley” podcast.
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” cryptocurrency meaning it has no central authority governing its issuance, unlike fiat currencies. It is built on so-called blockchain 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.
“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,” Rajan said.
“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…
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