A Bitcoin-Style Currency for Central Banks
The Bank of England asked researchers to invent a digital currency with a more centralized design.
The digital currency Bitcoin was designed to be independent of any government—a feature that also limits its mainstream appeal. Now 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.
The system, RSCoin, was designed by researchers Sarah Meiklejohn and George Danezis at University College London, at the suggestion of the U.K.’s central bank, the Bank of England. The bank began researching the idea of issuing digital currency early last year. Ben Broadbent, the bank’s deputy governor, said this month that it could make retail payments more efficient and the financial system as a whole more resilient. Software that can instantly move digital cash from place to place should be able to make many transactions, both large and small, faster and less costly.
Like Bitcoin, RSCoin uses cryptography to create a kind of digital cash that’s resistant to counterfeiting. And in both systems, transactions are verified in a process that adds them to a digital ledger recording all movements of the currency.
However, Bitcoin’s ledger is maintained by a collection of computers around the world, operated by various people and companies not sworn to any central authority. And its code decrees that there can never be more than 21 million Bitcoins (they are being trickled out over time, and 15 million are in circulation today).
RSCoin’s ledger is solely in the hands of the central bank, which would also retain a special encryption key that could be used to control the money supply—for example, to take actions like the quantitative easing programs the Federal Reserve and other central banks put in place after the 2008 financial crisis.
A small collection of third-party organizations would be chosen by the central bank to process new transactions and submit them for inclusion in the central ledger. Meiklejohn says it would make sense for large commercial banks to play that role. RSCoin’s centralized design, she says, means it can handle very large numbers of transactions, unlike Bitcoin (see “Technical Roadblock Might Shatter Bitcoin Dreams”).
Bhagwan Chowdhry, a professor of finance at UCLA, says that by adopting a system like RSCoin, central banks could enable the financial system to serve people much better. “The benefits of digital currency are immense,” he says.
Being able to move money more easily would grease the wheels of commerce and make basic financial services available to more people around the world, says Chowdhry. Integrating digital currency with the existing financial system would make it acceptable to many more people than Bitcoin is. “Though there is a fringe of libertarian population that would not welcome a centralized solution, most consumers would adopt it because they would perceive it to be safe and familiar,” he says.
Indeed, one reason a central bank might like a digital currency is that its ledger provides a very detailed record of financial activity. Meiklejohn says that a bank could choose to publish that ledger for transparency’s sake, and that it would also be possible to make transactions partially or fully anonymous.
RSCoin has so far been tested using 30 different computers inside Amazon’s cloud computing platform. Meiklejohn says she is talking with the Bank of England about doing more research on how it might be implemented in practice.
Meiklejohn and the bank are also interested in how a system like RSCoin could help banks and other financial institutions move conventional assets around and how it might automate certain transactions such as futures contracts. Many startups, as well as large computing companies including IBM, are also working on that idea (see “Microsoft Bets That Bitcoin-Style Blockchains Will Be Big Business”).
A paper on RSCoin was presented at the Network & Distributed System Security Symposium in San Diego last month.