Sunday, 13 March 2016

Can The Bank of England Compete With Bitcoin?

One of the perceptions of Bitcoin (which I wrote about previously) found by researchers is that potential users do not feel comfortable that there is no central authority controlling the currency. Not surprising, given this rather ironic perception, potential users generally did not understand how Bitcoin works and as there was no central authority overseeing it they felt to scared to use it.

Interesting then that the Bank of England is working with researchers at University College London, to define a centralised form of cryptocurrency: given these perception it is what some potential users might see as the best of both worlds.

The new cryptocurrency was first documented in a paper presented last month. It has been dubbed RSCoin.  And its not just theoretical as code for an implementation of the cryptocurrency proposed in the paper was also released.  There is considerable transparency in how this will work, which will hopefully reassure those that find central bank involvement unwelcome.

One of the researchers (Sarah Meiklejohn) is well known in cryptocurrency circles, having been central to work that showed how Bitcoin could potentially be deanonymised (which I discussed previously), and with whom I input to the recent work on virtual currency policy for the Commonwealth countries. Hence, I believe what these researchers have developed is based on truly practical concepts born of a deep understanding of the limitations of systems such as Bitcoin.

You can listen to Sarah talking about this in this podcast.

Whilst the proposed RSCoin does have a central authority that maintains control over monetary policy, the proposal guarantees transparency and auditability by engaging a series of distributed authorities (known as "mintettes"). RSCoin also recognises the scalability problems inherent in cryptocurrencies such as Bitcoin (discussed previously): whilst Bitcoin currently can process approximately 7 transactions a second, something like Visa has to cope with 3-7000 per second.  Clearly if a cryptocurrency is to be mainstream, and supported by a central bank it has to be designed from the beginning to be scalable to such levels.

The Bank of England isn't the first to propose its own digital currency.  Recently the People's Bank of China announced that it would be issuing its own digital currency in conjunction with a couple of well known commercial partners.  However, the definition of RSCoin suggests that it might very well be able to offer the best of both world - when others talk of digital currency they do not necessarily mean a cryptocurrency.

RSCoin has already been in small scale trials using 30 systems built on Amazon's Web Services.  I understand that the Bank of England are now considering a real-world implementation. 

It very much looks like the Bank of England has decided that if you cant beat them, you should join them.