August 20, 2020 at 11:43AM

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.

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. 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 increases in value … but use it for transactions. So the ultimate underlying value is going to be from the central banks, they’re going to preserve the value, not of Libra but of what Libra can be exchanged into,” he added.

One of the big challenges with digital currencies is the amount of data that comes with them. “Do you trust the central bank as much with details on every transaction you make? Should the government know? The beauty of the cash in our hands, is that it’s anonymous. Even if you’re not doing something illegal you don’t want the government seeing everything you do,” Rajan said.

“We need some sort of broader global rules of the game. What are countries going to do with data collected from abroad on who uses their currency? How do you make sure that the usual safeguards on that use are there? If somebody uses a foreign digital currency to buy certain services which could compromise them, can they be liable to espionage and blackmail, et cetera? And those are concerns that are not farfetched in today’s world,” Rajan told CNBC.

In a world where central banks issue digital currencies, bitcoin and Libra may find a place, CNBC, Aug 20

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From: The FxPro News Team
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