Raghuram Rajan expresses concern over complex ways of calculating value of bitcoins

Written by PTI | Mumbai | Updated: Feb 12 2014, 18:48pm hrs
BitcoinsRBI had, in late December, come out with an advisory for potential investors about the perils of investing in bitcoins.
Reserve Bank today raised concerns over the complex methodologies being used to determine the values of the virtual currencies (VCs) like bitcoins and litecoins.

"As a currency I do worry a little bit when the underlying fluctuates tremendously. One of the values of a currency is some stability.

"Who will maintain value - can we have confidence in an unseen, unknown centre which will maintain the value of the currency or an algorithm which will maintain the value of the currency," RBI Governor Raghuram Rajan said at a Nasscom function here.

The RBI, he said, is currently studying the issue and will come out with a "considered view" on virtual currencies soon.

The apex bank had, in late December, come out with an advisory for potential investors about the perils of investing in virtual currencies, but did not give clarity on the legal standing of such instruments.

In his remarks, Rajan also pointed his attention towards the element of speculation -- the value of a bitcoin has grown multiple times in the last few months -- in such virtual currencies.

If a "currency is a target of speculation as opposed to primarily a means of exchange, it does create some concerns for the user," he said.

According to some estimates, there are 30,000 people in India who are in possession of 1 per cent of around 12 million bitcoins in circulation across the globe. Bitcoins are probably the biggest of the virtual currencies.

According to some estimates, there are over 60 such currencies in operation at present.

"I don't want to say that there is no future for these virtual currencies. I think it is a process of evolution. But for now all we have done is express the kinds of concerns we have about it without determining in any way what we intend to do," the RBI Governor added.

"I do think that we have to understand the role of virtual currencies and how they will interact with paper currencies that you have. Who gets the benefit of senior age - that's an important question for governments," he said.

The virtual currencies started out as alternatives to the existing payment and remittance systems, and later acquired importance as an independent asset class with investors thronging to profit from the gains.

Most of these currencies run on complex algorithms whose architectures are designed to create scarcity with the passage of time, which also raises investor interest in them.