Raghuram Rajan | crypto: Why Raghuram Rajan refuses to get caught up in crypto mythology

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“The idea that these are stable forms of payment versus fiat currencies, central bankers can’t be trusted, but this crypto can be trusted by a small minority of people. So in big I am saying there are no large scale use cases at present; there are niche use cases,” says Raghuram Rajan, former RBI Governor and Professor of Finance at the University of Chicago Booth School of Business.

Is there really a use case for cryptocurrencies or is it just a passing fad? Cryptocurrencies come in different flavors. There is traditional cryptocurrency like Bitcoin, there is stablecoin like Tether and so on and there are different types. Now some of them are used for payments. Typically, payments that are either in the crypto world itself to buy crypto assets or in the past when a lot more were used for illegal payments and some were used for cross-border hawala – primarily to evade capital controls.

Of course, in some countries with a terrible currency that inflates at very high rates, what we get is an effective replacement of the national currency with a cryptocurrency. This is not because the authorities want it but because individuals prefer to trade crypto; Bitcoin or anything other than trade in the official currency. So there are varieties of such uses.

Is there now a crypto that is widely used in public by people? Not yet. And I feel like by then central banks will have figured out what a reasonable central bank digital currency would look like and they will want that to be the primary vehicle for transactions. So, any crypto has to deal with the possibility of central banks intervening.

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Much of the crypto mythology is about central banks inflating fiat money and so it’s the last refuge, etc., etc. but at the same time, we see these cryptos fluctuate in value. It’s not that they have stable values. you see Bitcoin up 20%, down 20%, sometimes big moves in the same day. So the idea that these are stable forms of payment compared to fiat currencies, central bankers cannot be trusted but this crypto can be trusted belongs to a small minority of people. So basically I’m saying there’s no large-scale use case right now; there are niche use cases.

Now, what are people betting on? They are betting on crypto becoming a dominant force which may be the case but it requires new uses, not traditional payments. UPI in India is fantastic. Why would you need an alternative to UPI? So where does crypto come from? It comes in two forms: micro-transactions where it is too expensive to make the transaction every second but can be done with cryptos because everything is automated; It’s a possibility. But this is not yet the practice.

The second possibility concerns smart contracts. In securities trading, I have to deliver a security and I receive payment. A smart contract can do this without the intervention of a third party. So in many cross-border transactions, when you don’t want a third party involved, smart contracts can work. So there are places where they can be used, but you don’t see a lot of that use yet. Will there be this killer application, a crypto killer? Maybe, but which of the 6,000 coins will it be?

The point I’m trying to make is that for someone with limited resources, cryptos are not the safe investment you want to be in. You could lose all your money if you invest in the wrong crypto, you could lose all your money if cryptos become less fashionable than them because there is no substantial use case yet. Will any of them now become the currency of the future? Perhaps and certainly the central banks will try to provide competition, but we are still a long way from that and it is a very speculative investment.

There was a huge clamor from the bond market for the inclusion of India in the global bond index. Do you see this as a net positive or will it increase short-term flows and therefore our vulnerability? I don’t have a strong opinion on this. I would like to see more studies. I fear that we will become more correlated with the international markets and less with the domestic situation and if one is a large part of the index, this correlation could most likely increase.

So unless we have a deep need for external financing I think we should try to keep our current account deficit reasonable so that we don’t have that and if we need that financing it will come through long-term monetary FDI. I’m not a fan of foreign investment in our unicorns. We should be putting more domestic venture capital into it, but I think those are safer ways than getting bond streams. Of course, if we have bond flows, I prefer long-term bond flows over short-term bond flows even though both can be sold instantly. At least the guy who buys long term suffers a little more from the hit when interest rates move than the guy who is an investment tourist.

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