- Cryptocurrency bitcoin and Facebook-backed Libra could play a role in a world where central banks globally begin to issue their own digital currencies, Raghuram Rajan, former Reserve Bank of India governor, told CNBC.
- Rajan called bitcoin a "speculative asset" while Libra has been designed for transacting.
- Both could have different roles to play when central banks begin to issue digital currencies.
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 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.
The former central banker said that having a private digital currency that had a "monopoly" would be "problematic." But ultimately there will be competing private digital currencies with different roles.
"So the bottom line I think is different private currencies will do different things and it may be bitcoin has value going forward just as a store of value, or as a speculative asset. While Libra may be the kind of currency which is used more for transacting," Rajan said.
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.
The same issue is true of private digital currencies. But Rajan said that there may be need to "integrate the data" between these competing digital currencies "because you don't want the whole thing to be Balkanized."
He added, however, that there are several questions to be answered about how to safeguard that data.
"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.