Cryptocurrency could weaken central bank’s control over money, says former RBI governor


In the early stages of human, there was a barter system of exchange which later on diminished due to its inherent flaws in it, and from then many types of research has been made to make Digital money, and slowly the paper and coin currency have been introduced and got popular all around the world.

Whenever there is a new and disruptive technology, it will often face heavy backlash, especially from the people who hold the status quo.

Similarly, cryptocurrency, which forced its way into our society, threatens the traditional way of money control. Naturally, banks who hold the main control over the direction of a country’s and the world’s economy feels insecure of this newcomer.

On Wednesday, December 8, the National Stock Exchange (NSE) and New York University (NYU) Stern School of Business, organized a special webinar on the rise of cryptocurrency and its effects on the central banks.

During the session, former Reserve Bank of India Governor Duvvuri Subbarao has said the central bank could lose control over money supply and inflation management if cryptocurrency is allowed in the country.

He also noted that India’s case for issuing a central bank digital currency (CBDC) may not be strong as there are capital controls.

“Crypto is backed by algorithms and there is fear that the central bank might lose control over money supply and inflation management. There are also concerns that crypto will disrupt the monetary policy,” he said.

“Crypto can jump capital controls; fiat money is linked to the reserve currency,” he added.

Rao, who served as the governor of RBI from 2008 to 2013, said CBDC also needs robust data protection laws.

According to him, cash is on its way out in India and digital payments are becoming popular.

However, Rao said owing to the pandemic, currency circulation has increased as people held on to cash due to lockdowns. “The central bank’s role as last-resort lender should not be hampered.”

India is not yet sure on where it stands on cryptocurrency. While the rise of cryptocurrency is inevitable, governments trying to find a way to retain the power of this decentralized payment method.

In that regard, while India has put a partial ban on the new currency, it is also keen on introducing a bill in regulating cryptocurrencies, while RBI is gearing up for the launch of its own digital currency.

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, is listed for introduction in the Lok Sabha next week. The bill seeks to “create a facilitative framework for the creation of the official digital currency to be issued by the Reserve Bank of India.  It also seeks to prohibit all private cryptocurrencies in India, however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses”.

The Reserve Bank of India has repeatedly reiterated its strong views against cryptocurrencies, saying they pose serious threats to the macroeconomic and financial stability of the country and also doubted the number of investors trading on them and their claimed market value.

The RBI had announced its intent to come out with an official digital currency in the face of the proliferation of cryptocurrencies like Bitcoin, about which the central bank has had many concerns.