Crypto Speculation Has Had Its 'Comeuppance': Raghuram Rajan

DAVOS, Switzerland — Crypto as a speculative asset class has had its “comeuppance,” said economist and the former governor of India’s central bank, Raghuram Rajan.

But that doesn’t mean the technology that underlies crypto deserves punishment as well – and regulators should be wary of innovation-stunting bans, he told CoinDesk at the World Economic Forum’s annual meeting in Davos, Switzerland on Tuesday.

“I don't think you want to rule out this technology and say it has failed as a speculative asset. I think it's had its comeuppance. But I think as a technology, I don't think we've seen the limits of it,” Rajan said.

The industry made a splash in Davos last May following a historic bull market that quickly turned into the worst crypto winter on record. But in the aftermath of a series of high-profile collapses culminating in the infamous fall of Sam Bankman-Fried’s FTX, crypto advocates and companies in the Swiss town this year are already working to shift the focus towards building on blockchain technology.

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

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

The problem, as Rajan sees it, also arose from advocates 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.

“Turns out you can't really do it, and you always depend on some central party,” Rajan said, adding the industry should focus more on use cases like improving cross-border transactions, “especially as countries start to get at loggerheads with each other.”

Read more: New Global CBDC Platform Could Cut Payment Costs, IMF Says

As Rajan views it, crypto’s future could depend on its ability to move away from the narrative of distrust toward central banks and finding ways to coexist.

That means regulators have to play nice as well.

Central banks, for instance, should not aim to “displace the private sector” by issuing digital iterations of sovereign currencies, Rajan said. He added that central bank digital currencies should, rather than try to compete with the private sector, offer a public platform on which the private sector can operate.

“I think, ultimately, that's a win-win,” he said.

Rajan added that, although policymakers should set up ways to “filter” out bad actors in the space banning crypto altogether – something that the Reserve Bank of India has wondered aloud on more than one occasion in the last few years – may not be the answer.

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

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

On Tuesday, discussions around crypto in Davos indicated the industry felt regulators may also need to consider a shift in their focus and move away from obsessing over crypto’s threat to financial stability – which turned out to be a moot point as the contagion from the many crypto bankruptcies last year failed to harm broader economies – to make concerted efforts to improve consumer protection.

Innovation always begets some bad decisions and losses, according to Rajan, but that doesn’t mean new developments must be thwarted.

“Allowing some freedom within constraints that might be aimed at getting the excess speculation as well as fraud out – that seems to me a better way to go than to just ban any technology,” he said.

Read more: Blockchain’s Non-Crypto Applications Take Center Stage on Davos Day 2

Jack Schickler contributed reporting.