The growing interest in financial technology or FinTech is being driven by two key innovations, namely, Market Place Financing or Crowd Funding and blockchain technology, a Reserve Bank of India official said recently.

Speaking at a FinTech Conference 2017 organized by IBA, FICCI and NASSCOM in Mumbai, RBI Deputy Governor Rama Subramaniam Gandhi said that blockchain is a disruptive innovation and noted that using this technology, certain innovative products, such as Bitcoin, have excited a large section of people around the world.

“The way the BitCoins have caught the imagination, generated interest, and gained value has led to some quarters predicting end of the currency system”, Gandhi said. “I suppose these predictions about of death of banks and financial institutions, and also the currency have naturally aroused the curiosity at minimum and concerns among the regulators and central bankers around the world.”

Further elaborating the debate on this “death of currency”, Gandhi explained the efforts by a number of experts including Timothy May of Intel and Eric Hughes, Wei Dai and Nick Szabo to create an independent digital currency, which was ultimately achieved by Satoshi Nakamoto in the form of Bitcoin. However, he believes that the potential of these virtual currencies is being overstated.

“You now have a digital currency; not created by authorities; more and more people have accepted it. Bitcoins have acquired value; they are being used for settling varieties of economic transactions; people are using them as investments and store of value. So ‘currency’ is being eliminated”, he said. “Blockchain, the foundation for Bitcoins like innovations, is touted to be the death knell of currency. I believe its potential is being overstated.”

He argues that these digital currencies pose potential financial, operational, legal, customer protection and security related risks. As they are stored in digital/electronic media, they are prone to losses arising out of hacking, loss of password, compromise of access credentials, malware attack, etc. Moreover, as payments by VCs are on a peer-to-peer basis, no established framework for recourse to customer problems/disputes/charge backs, etc. is feasible.

“Value seems to be a matter of speculation. Legal status is definitely not there”, he added. “And finally, the usage of VCs for illicit and illegal activities has been reported as uncomfortably large.”

Gandhi further said that his arguments are based on two key elements viz., Confidence and Anonymity. He explained:

“The ‘confidence’ in BitCoins or for that matter any virtual currency based on blockchain or any other technology is also limited to its initial rounds and circles only; the initial rounds are always filled with adventurists and risk seekers; the moment masses get in, the risk-avoiders get in, they will need greater ‘confidence’ for acceptance and that can come only if an ‘authority’ issues it. As regards ‘anonymity’, the blockchain technology apologists say it can be made very difficult to track; they say ‘difficult to track’, and that is not ‘anonymity’. Therefore, it may remain a pipedream that blockchain will eliminate ‘currency’, by ushering in ‘virtual currency’.”