In September Bitcoin Magazinereported that Andrew G. Haldane, chief economist at the Bank of England (BoE), hinted at the possibility that the U.K. government might issue a digital currency.
“What I think is now reasonably clear is that the distributed payment technology embodied in Bitcoin has real potential,” said Haldane. “Bitcoin’s ‘blockchain’ technology appears to offer an imaginative solution to that distributed trust problem. That is why work on central bank-issued digital currencies forms a core part of the [BoE]’s current research agenda.”
Haldane left as open questions whether blockchain technology could support central bank-issued digital currency, and whether the public would accept it as a substitute for paper currency.
Earlier this month, Ben Broadbent, BoE’s deputy governor, said that distributed ledger technology could make retail payments more efficient and the financial system as a whole more resilient.
“The main point here is that the important innovation in bitcoin isn’t the alternative unit of account – it seems very unlikely that, to any significant extent, we’ll ever be paying for things in bitcoins, rather than pounds, dollars or euros – but its settlement technology, the so-called ‘distributed ledger,’” he said.
Broadbent confirmed that the BoE is actively pursuing distributed ledger research, and added that a central bank digital currency would involve putting reserve deposits on a distributed ledger.
“The issue of digital currencies forms an important part of our One Bank Research Agenda,” concluded Broadbent. “In publishing the Agenda a year ago, we asked for help, hoping to encourage ‘the wider academic community’ to think about the big policy questions.”
The One Bank Research Agenda paper noted that blockchain fintech could reshape the financial industry and called for further research to devise a system that could use distributed ledger technology without compromising a central bank’s ability to control its currency.
Now, British researchers have invented a Bitcoin-like system that could make digital cash more practical by allowing a central bank such as the Federal Reserve to control it, MIT Technology Reviewreports.
University College London researchers George Danezis and Sarah Meiklejohn presented a paper titled “Centrally Banked Cryptocurrencies” at the Network & Distributed System Security Symposium in San Diego last month. The paper, which acknowledges contributions from the BoE, introduces RSCoin, “a cryptocurrency framework that decouples the generation of the monetary supply from the maintenance of the transaction ledger.”
“Our design decisions were largely motivated by the desire to create a more scalable cryptocurrency, but were also inspired by the research agenda of the Bank of England, and the question of ‘whether central banks should themselves make use of such technology to issue digital currencies,’” note the researchers. “Indeed, as Bitcoin becomes increasingly widespread, we expect that this will be a question of interest to many central banks around the world.”
RSCoin would be a closed, “permissioned” blockchain offering the advantages of digital currencies – fast and cheap transactions permanently recorded in a shared distributed ledger – without the troublesome openness of the Bitcoin network where anyone can be an anonymous node on the network. Instead of anonymous miners, only the central bank and vetted financial operators would be allowed to validate RSCoin transactions.
Permissioned blockchains are supported by, among others, Accenture and Digital Asset Holdings CEO Blythe Masters, but others, including legendary cryptographer Nick Szabo, strongly argue that financial operators should, instead, embrace the crowd-sourced power and resiliency of permissionless blockchains like Bitcoin.
RSCoin would be controlled by the central bank, which would also retain a special encryption key that could be used to control the money supply – as it happens, for example, in Quantitative Easing (QE) programs.
As reported by MIT Technology Review, Meiklejohn says it would make sense for large commercial banks to process and validate transactions in the RSCoin network. Meiklejohn added that RSCoin’s centralized design would permit a high transaction throughput, unlike Bitcoin. In fact, a recent study shows that, in the current design of Bitcoin Core, there is a fundamental conflict between throughput and decentralization. Incremental improvements could permit a throughput of about 27 transactions per second in the Bitcoin network, but “more aggressive scaling will, in the longer term, require fundamental protocol redesign.”
“[RSCoin] provides the control over monetary policy that entities such as central banks expect to retain,” conclude Danezis and Meiklejohn. “By constructing a blockchain-based approach that makes relatively minimal alterations to the design of successful cryptocurrencies such as Bitcoin, we have demonstrated that this centralization can be achieved while still maintaining the transparency guarantees that have made (fully) decentralized cryptocurrencies so attractive.”
RSCoin currently is only a research proposal, but it’s interesting to speculate on whether it could become an official project of the BoE, as previous – veiled but clear – statements by the central bank seems to indicate.