Crypto speculation has had its “comeuppance”: Raghuram Rajan

DAVOS, Switzerland – Crypto as a speculative asset class has had its “comeuppance,” said economist and former Reserve Bank of India governor Raghuram Rajan.

But that doesn’t mean the technology that underpins crypto also deserves punishment — and regulators should be wary of bans that stifle innovation, he told CoinDesk at the World Economic Forum’s annual meeting in Davos, Switzerland on Tuesday.

“I don’t think you want to write off this technology and say it’s failed as a speculative resource. I think it’s come along. But I think as a technology, I don’t think we’ve seen the limits of it,” Rajan said.

Rajan agreed that was where the focus should be. The crypto industry spent too much time chasing the idea of ​​creating an inflation-resistant “alternative to fiat money” that countered central banks “flooding the world with fake money.”

“I think it was a weak rationale,” Rajan said.

The problem, as Rajan sees it, also arose from proponents of decentralization who argued that every ledger of transactions needed to be decentralized and it could be done without “trust” placed in currency issued and backed by a central bank.

“It turns out you can’t really do that and you’re always dependent on a central party,” Rajan said, adding that the industry should focus more on use cases like improving cross-border transactions, “especially as countries start to conflict with each other.”

As Rajan sees it, crypto’s future may depend on its ability to move away from the narrative of mistrust of central banks and find ways to co-exist.

That means regulators also have to play nice.

For example, central banks should not aim to “displace the private sector” by issuing digital iterations of sovereign currencies, Rajan said. He added that central banks’ digital currencies should, instead of trying to compete with the private sector, provide a public platform on which the private sector can operate.

“I think, at the end of the day, it’s a win-win,” he said.

Rajan added that while policymakers should set up ways to “filter out” bad actors in the space and ban crypto altogether — something the Reserve Bank of India has wondered aloud on more than one occasion in recent years — the answer might not be .

“I really think you have to be very, very careful with bans, because then you stop development,” Rajan said.

In India’s case, the central bank may be under the impression that most retail investors entering the crypto space may not fully understand the risks involved, he said.

On Tuesday, discussions surrounding crypto at Davos indicated that the industry believed that regulators may also need to consider a shift in focus away from obsessing over crypto’s threat to financial stability – which proved a contentious point as the contagion from the many cryptocurrencies . bankruptcies last year failed to hurt wider economies – making concerted efforts to improve consumer protection.

Innovation always breeds some bad decisions and losses, according to Rajan, but that does not mean that new developments must be hindered.

“Allowing some freedom within constraints that might be aimed at weeding out excess speculation as well as fraud — that seems to me like a better way to go than just banning technology,” he said.

Jack Schickler contributed reporting.