The battle of bitcoin vs banks looks set to wane as a cryptocurrency named RSCoin, designed specifically for central banks, has been launched Academics at University College London (UCL), noted for its multidisciplinary research.
Perhaps following the old adage “if you can’t beat them, join them”, the Bank of England (BoE), People’s Bank of China (PBOC) and Reserve Bank of Australia (RBA) are among a number of the world’s central banks to have expressed interest in blockchain technology and the potential of digital currencies.
The BoE’s February 2015 discussion paper, entitled ‘One Bank Research Agenda’, explored the role digital currencies could play for central banks. More recently, the BoE’s deputy governor, Ben Broadbent, said that a digital currency under central bank control could offer efficiencies to retail payments while also helping to make the financial system as a whole more resilient.
One year on from that publication, a study released this month from UCL academics Dr Sarah Meiklejohn and Dr George Danezis, takes the idea further by exploring the opportunities for central banks to implement digital currencies, without the limitations of established cryptocurrencies such as Bitcoin.
In the paper Meiklejohn and Danezis observe that while decentralised currencies have benefits such as independence from political control, they also face challenges in terms of cost, control and scalability that make them unsuitable for a central bank.
Gain without pain?
At a high level, RSCoin is designed to leverage the advantages of the distributed ledger technology that underpins Bitcoin and other digital currencies, but without the limitations like scalability and currency volatility, state the authors. It has already undergone trial testing, using 30 different platforms inside Amazon’s cloud computing platform
The main difference between RSCoin and other crypto currencies is that it “decouples” the creation of monetary supply to the maintenance of the transaction ledger. RSCoin’s framework enables central banks to stay in control over monetary supply; something they could not do with Bitcoin for example. Additionally, while RSCoin would follow Bitcoin in using blockchain the BoE would hold an encryption key that it could use to control the available supply of the digital currency.
Among other proposals is that a small number of selected third parties would be chosen by the central bank to process new transactions and submit them for inclusion in the central ledger. Meiklejohn suggests that major commercial banks could take on this role, as RSCoin’s centralised design means it has the edge over Bitcoin in its ability to handle a high volume of transactions.
“RSCoin’s radical shift from traditional cryptocurrencies is to centralise the monetary supply,” according to the study. “Every unit of a particular currency is created by a particular central bank, making cryptocurrencies based on RSCoin significantly more palatable to governments”. Central banks could utilise the same framework for developing their digital currency, but maintain a separate blockchain.
Meanwhile, the researchers believe that RSCoin still provides the advantages of distributed ledgers, such as greater transparency over transactions, while preventing issues like double spending (a type of attack where digital currency tokens are spent more than once in a single transaction). By using cryptography it can minimise the potential for counterfeiting and tampering.
“Despite this centralisation, RSCoin still provides the benefit over existing (non-crypto) currencies of a transparent transaction ledger, a distributed system for maintaining it, and a globally visible monetary supply,” they argue. “This makes monetary policy transparent, allows direct access to payments and value transfers, supports pseudonymity, and benefits from innovative uses of blockchains and digital money.”
The UCL paper comes amid growing interest in blockchain from traditional finance players in addition to the world’s major central banks. R3, the consortium exploring blockchain integration for banks whose members include Goldman Sachs, Citi, BNP Paribas and Banco Santander, has just completed a pilot that involved 40 banks joining five different blockchains. The experiment saw the group trial issuance, secondary trading and redemption of a commercial paper.
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