The Bank of England is working with researchers at University College London to design a Bitcoin clone of its own that can be centrally controlled.
A recent MIT Technology report claimed that the UK’s central bank had reached out to university researchers to help it create a cryptographically secure digital currency. The resulting system has now been revealed, and is named RSCoin.
The RSCoin system, developed by Sarah Meiklejohn and George Danezis, employs cryptography to obviate counterfeiting and tampering. Unlike other mechanisms, the digital ledger used by the new cryptocurrency is handled exclusively by a central body. The report explained that RSCoin will only be made accessible to central bank users in possession of a specific encryption key.
Meiklejohn added that eventually third-party institutions (i.e. commercial banks) would be selected by the central bank to join the ledger. She detailed that these collectives would help the central bank process new transactions and submit them for inclusion in the central bank-owned ledger. The developer also noted that RSCoin differs notably from Bitcoin due to its centralised design and ability to handle huge volumes of transactions.
Is bitcoin irrelevant to the U.K. economy? Well perhaps the biggest authority on that, the Bank of England, has weighed in on the cryptocurrency today, and its conclusion is basically thus: While bitcoins in circulation in the U.K. pose no threat to the financial system, and perhaps never will, the technology raises interesting possibilities that could one day have ramifications for stocks, other financial products and even physical assets like gold.
The bank estimates some 20,000 people (of a nation of 60 million at the moment) in the U.K. hold bitcoins. And daily transactions number about 300 or so.
As a proportion of the U.K. economy that’s obviously tiny: In all the £60 million of bitcoins circulating in the U.K. represent a tiny 0.003% of British broad money balances. All of which means that bitcoin currently represents no financial stability risk to Britain.
What’s more, there are reasons to believe that Bitcoin’s relative importance to the economy won’t grow much, the BOE’s economists add. Why? Well, although one of the prime attractions to bitcoin is how cheaply it can be transacted, its design suggests transaction fees would rise with usage and that could limit interest.
And its attractiveness as a medium of exchange is also limited by its volatility. With bitcoin’s total supply limited in advance, it won’t be able to respond to normal economic fluctuations in demand. So where a central bank can adjust liquidity to meet economic conditions, a bitcoin based economy would see the electronic currency’s value swing violently.
But the bank, which has touched on bitcoin before but has never opined in this level of detail, says all this doesn’t mean its uptake couldn’t change in future.
