Moving further to the Blockchain Week, this is the time to discuss some practical and recent scenarios, happening in the world, and are based on the utilization of technology. In my previous articles, I mentioned that we shouldn’t be surprised to see various institutions, especially the ones in financial sector, using the concepts in their applications and processes. This article talks about one such case. The new cryptocurrency is being developed by the Bank of England. The central bank has recently announced its plans to come up with its own Bitcoin-like cryptocurrency called RSCoin. It is being said that it would function on the same blockchain ledger technology that runs Bitcoin.
The cryptocurrency being created by The Bank of England is a form of digital cash that supposedly cannot be counterfeited or tampered. RSCoin was initially designed by two researchers who belong to University College London, which works significantly similar to Bitcoin however enables a higher degree of centralized control. The researchers asserted that they have tested the RSCoin on 30 servers inside the Amazon’s cloud computing service . Now, the researchers are in discussion with the BoE regarding the implementation of the RSCoin across all the financial channels.
The central bank of England would be the only entity controlling this distributed ledger, and would also be in possession of a special encryption key. This key has been designed to permit the bank to add or subtract cryptocurrency from the ledger, as a means to control the total size of blockchain and to follow national and international financial regulations put in place after financial crisis of 2008. The new initiative by Bank of England is an interesting move, however, a few key impacts will emerge. RSCoin’s supply is to be controlled by the bank that can harm its valuation. In addition, some experts also feel that this can grant powers to few individuals in BoE to artificially change the rates acting in their own interests, instead of doing what’s actually good for the future of cryptocurrency .
The major difference between Bitcoin and RSCoin being, bitcoin is completely decentralized digital currency, available to everyone in the world, outside the banking channels. RSCoin currently is just on a research proposal, however, it is interesting to speculate on whether it could be an official project of the BoE, as last veiled but clear statements made by the central bank seems to show.
One of the designers of RSCoin has stated that whoever reacts quite slowly to these developments is going to take it on the chin. They are going to lose the business. He advised that businesses should pay very close attention to what is happening, since this will not go away. Middlemen layers in the payment systems face a creeping risk across the nexus of stockbroking, commerce, currency trading and derivatives . Deep in the markets, there seem dark pools trading the shares, and entities that are facilitating the foreign exchange. There are Master, PayPal and Visa. These are the kinds of people who are going to be disrupted.
Shifting deposits to the central bank, and away from the leveraged commercial banking sector, has two important implications. On the one hand, it would probably make them safer. Currently, retail deposits are backed mainly by illiquid loans, assets that can’t be sold on open markets; if we all tried simultaneously to close our accounts, banks wouldn’t have the liquid resources to meet the demand . The central bank, by contrast, holds only liquid assets on its balance sheet. The central bank can’t run out of cash and therefore can’t suffer a ‘run’.
On the other hand, taking deposits away from banks could impair their ability to make the loans in the first place. Banks would be more reliant on wholesale markets, a source of funding that didn’t prove particularly stable during the crisis, and could reduce their lending to the real economy as a result.
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