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Raghuram Rajan, governor of the Reserve Bank of India (RBI), said digital currencies such as bitcoin would be helpful in the transition towards a cashless society, as they become better and safer in the future.
In an interview with NDTV, Rajan said the digital currency is "fascinating", despite apparent drawbacks.
"I think we are still watching the evolution of these kinds of currencies," he said.
"One of the problems that we envisage with bitcoin is security issues. You've seen that it is not as secure as people thought they were and there have been stolen bitcoins and so on."
"But the second issue is the fluctuation in value. For money you require a stable store of value. Something that fluctuates so much is less effective for use as money."
However, Rajan noted that the technology used in digital currencies is promising, and they will become safer and better in future.
"Some of them are useful, some of them are worrisome and we have to see how we take on such technologies," he said.
"I have no doubt that down the line we will be moving towards primarily a cashless society and we will have some kinds of currencies like this which will be at work."
"Over time they will be a form of transaction, that's for sure."
He added that central banks across the globe could one day embrace a digital currency system.
The RBI, like many of its peers across the globe, has earlier issued warnings about the use of digital currencies. It advised customers to exercise enough caution before using them as an investment and a mode of payment.