Former Reserve Bank of India (RBI) governor Raghuram Rajan said some cryptocurrencies may have a “potential future” as the industry gets regulated and crypto money finds more real-world use cases.

Rajan’s forecast came with the caveat that it was applicable only to stablecoins and to the promise of cryptocurrencies in the field of cross-border payments.

“I think there will be use cases that will emerge -- stablecoins, properly regulated, have a future,” Rajan said at Reuters Global Market Forums on August 25.

Stablecoins are cryptocurrency tokens that use the same blockchain technology as other tokens, but their values are fixed to underlying assets like other fiat currencies or commodities like gold.

Rajan, who was also the chief economist for the International Monetary Fund (IMF), called for quick and appropriate regulations, especially for stablecoins as the adoption of such technologies continues to increase.

In the recent 2021 Global Crypto Adoption Index made by blockchain data platform Chainalysis, India ranked second out of 154 countries in global cryptocurrency adoption even though it remains in a legal grey area within the country. A cryptocurrency Bill that will legislate regulations on the matter is currently being worked on in the Cabinet.

Rajan, however, was less sure about the fundamentals that were driving the valuations of cryptocurrencies like Bitcoin, which is trading at a price of upwards of $47,000.

“Right now, in this heady environment with asset prices really picking up, many cryptos are also being valued not so much as a means of payments but as assets in their own right. There is a valuation, but what is the fundamental backing of that valuation -- it’s not clear,” he said.

Rajan dismissed claims that cryptocurrency is more stable than fiat currencies as "silly."

“But crypto focused primarily on evading authorities, or primarily on the somewhat silly, in my view, notion that this is much more stable a store of value than fiat currencies -- yes, there's been a lot of monetary easing, but that doesn't mean fiat currencies are going to implode and there's going to be hyperinflation. One could argue that there's much less supporting the value of these cryptos than what is supporting the value of fiat currencies,” said Rajan, who is also a professor of finance at the University of Chicago’s Booth School of Business.

“So, there is sort of a paranoid view of the value of cryptos. This (sic) your last resort when the world implodes. I don't think so. I think the value of cryptos has to be seen more in terms of are they going to be useful in the system going forward,” added Rajan.

The recent burst in the valuation of cryptocurrencies may also be driven by psycho-sociological factors. The recent study titled ‘The Psychology of Cryptocurrency Trading: Risk and Protective Factors,’ published in the Journal of Behavioral Addictions found that engagement was largely driven by social media platforms and fear of missing out (FOMO) sentiment when it came to cryptocurrencies.

Rajan highlighted that the true value of cryptocurrencies will be unlocked by emerging technologies and use cases, where they will become effective instruments. Cross-border payments, which traditionally are marred by high transaction costs and downtime, could be one potential area where cryptocurrencies could shine, according to Rajan.

“I think some cryptos, even though they have fluctuating values, might find a way to become an effective means of payment. Cross-border payments is one area which is wide open, because of the huge transaction costs of making (such) payments,” said Rajan.

“But I will say that I would be much more confident about the value of these cryptos once they find proper use cases, and the technology is evolving to make that happen.”

(Edited by : Shoma Bhattacharjee)

First Published:Aug 27, 2021 6:04 PM IST