Mumbai: The potential of blockchain technology to eliminate physical currency by ushering in virtual currencies like Bitcoin might be overstated, said Reserve Bank of India (RBI) deputy governor R. Gandhi.
“Innovations admittedly bring in positive changes in efficiency, productivity, quality, competitiveness and market share, among other factors. However, as innovations result in a paradigm shift they are typically disruptive,” he said.
While speaking at an event organized by the Federation of Indian Chambers of Commerce and Industry (FICCI) on Wednesday, Gandhi pointed out that while the death of currencies as we know it has been predicted for many years, there has actually been an increase in the currency in circulation around the world, apart from Nordic countries.
According to the deputy governor, virtual currencies pose financial, operational, legal, customer protection and security-related risks.
“They are prone to losses arising out of hacking, loss of passwords, compromise of access credentials, malware attacks etc.,” Gandhi said. Moreover, virtual currencies also do not have any feasible customer grievance, customer problem or charge-back mechanism, he added.
While speaking about currencies, the central banker pointed out that to be effective, a currency needs to uphold concepts of confidence and anonymity at all times. However, after the initial rounds of usage, these concepts cannot be sustained in virtual currencies.
“There is no underlying or backing of any assets for these currencies and value seems to be the matter of appreciation and speculation. Legal status is definitely not there. Usage of VCs (virtual currencies) for illicit and illegal reasons has been reported and it is becoming uncomfortably large,” Gandhi noted.
In case of anonymity, while blockchain apologists say that it is rather difficult to track the currency, it not impossible, he maintained.
Talking about another major innovation in the financial technology space, marketplace lending or crowdfunding, the central banker noted that after the first few rounds of funding and successes, as a larger number of people get attracted to the concept, the system is likely to collapse. This makes marketplace lending unsustainable for a large number of people or amounts.
“Any democratic system cannot dismiss ‘consenting adult’ argument and a ‘consenting adult’ argument cannot be presented when a mass scale failure takes place,” he said.
This is why there was need for a regulated and organised entity to indulge in marketplace lending to protect the weak and innocent, he added.
In his speech, Gandhi said that there was a case for financial regulators to come together and create their own virtual currency, for the betterment of the financial system and the customers. He also said that banks must consider collaborating with financial technology companies and either adopt or adapt newer technologies like blockchain to improve services and benefit from them.