RSCoin is not a Bitcoin alternative

Last week, a research project from the Computer Science faculty of University College London hit the headlines. With the support of the Bank of England, UCL’s George Danezis and Sarah Meiklejohn have proposed a centralised cryptocurrency, modelled on Bitcoin, that could be issued by central banks.

Some reports have indicated that the Bank of England might begin an eighteen-month pilot of the scheme in the near future.

This caught my eye for more than one reason. Not only — whatever you think of central banks — is it a bold proposition, but there is a personal angle. In the Eighties, I acquired my BSc(Econ) from UCL, and I know from my own experience that it has always been a powerhouse of original thinking and mathematical rigour — as might be expected from an institution founded by the father of Utilitarianism himself, Jeremy Bentham.

Back in the day, it was all about econometrics and the groundbreaking field of environmental economics (my tutor, the late David W Pearce, wrote the seminal book Blueprint for a Green Economy), rather than cryptocurrencies, but regardless of the subject matter, the department left its dry competitors at other universities in the dust, with its energy and focus on new ideas.

In those days, cryptocurrency was a distant dream. David Chaum may have laid the foundations with his 1982 paper on blind signatures, but he didn’t found DigiCash until 1990. And in an unimaginable Eighties world where the personal computer was not yet a thing, where there was no worldwide web, and where students wrote cheques to supermarkets and prayed they would not bounce, few would have been able to envisage a world where magical internet money was a possibility.

I guess all this is trying to say in the politest way possible that I have read the RSCoin paper carefully and it appears both plausible and well written.

The authors pay tribute to Bitcoin and acknowledge its success, describing their approach as: ‘constructing a blockchain-based approach that makes relatively minimal alterations to the design of successful cryptocurrencies such as Bitcoin’.

But in my view, the similarities end here.

Mechanically and mathematically, RSCoin may be close to Bitcoin. But philosophically, it could not be further away.

The paper goes on to describe how ‘RSCoin introduces a degree of centralization into the two typically decentralized components of a blockchainbased ledger: the generation of the monetary supply and the constitution of the transaction ledger. In its simplest form, the RSCoin system assumes two structural entities: the central bank, a centralized entity that ultimately has complete control over the generation of the monetary supply, and a distributed set of mintettes*.’

Given that decentralization is the key tenet of Bitcoin and the equal status of the competing nodes, incentivised only by cryptoeconomic tokens, is its core principle, somehow the essence of RSCoin feels as distant from Bitcoin as it is possible to be.

The October 2015 Economist blockchain cover memorably described the technology as ‘a trust machine’. The notion of trust arises from the equality of the nodes, and the egalitarian idea that anyone in the world can run a node, so that bad actors are crowded out by good (the antithesis of Gresham’s Law).

Even supporters will acknowledge that the expensive and wasteful energy consumption generated by Proof of Work has tended to centralize rather than decentralize Bitcoin, but that brings me to my point. This centralizing tendency is perceived as a generally Bad Thing. With RSCoin, on the other hand, centralization is baked in. Trust in the system is supposed to come from an honest belief that the central bank will always act in the best interests of the citizens, rather than from a mathematically derived, politically neutral structure.

The authors address issues of trust and transparency by referring to intrinsic blockchain properties such as ease of auditability:

‘…anyone with access to the logs could verify not only the actions of the mintettes, but could also replay these actions to compare the ledger agreed upon by the mintettes and the ledger published by the bank; this would allow an auditor to ensure that the bank was not engaging in misbehavior by, e.g., dropping transactions.’

It’s the ‘anyone with access to the logs’ part that concerns me. People living in democracies tend to trust their civil servants and those appointed by the government to do the right thing. But the minute a system is centralized and placed under the control of people who can decide — for reasons good or bad — to act on behalf of the electorate, then trust becomes something entirely different.

The idea of RSCoin does not thrill me. There would be significant advantages for the government of the day (translation: disadvantages for many ordinary people), as it would make macroeconomic policies more effective. Negative interest rates would be much easier to enforce. Ultimately, it’s hard to see how physical money would co-exist with a new system like this, so the idea of paying in cash for certain transactions would be a distant memory.

On the other hand, it doesn’t particularly scare me. The Bank of England already manipulates the money supply as it sees fit. Getting rid of metal and paper probably won’t make things much worse.

Bitcoin and/or other cryptocurrencies would doubtless survive in parallel, despite efforts by the authorities to crack down. Corporate payment methods provided by other (non-bank) entities will become overwhelmingly popular. That’s my belief anyway.

In summary, my main objection to RSCoin is not its implementation but the idea that it is somehow a bigger, better version of Bitcoin, as the Telegraph headline crows: Central banks beat Bitcoin at own game with rival supercurrency.

RSCoin is a rival to the pound, not to Bitcoin. It is no more an alternative to existing cryptocurrencies than a cat is an alternative to a dog, or Coca-Cola is to soya milk. They may share certain attributes, but one is not a straight replacement for the other.

If you doubt this, read the Telegraph article. Some people may agree with this statement by Ambrose Evans-Pritchard. But those who have studied history and thought intelligently and deeply about what trust really means will not:

“The RSCoin is deemed more likely to gain to mass acceptance than Bitcoin since the ledger would remain exclusively in the hands of the central bank, with the ‘trust’ factor of state authority.”

I leave you with that thought.

*I originally thought ‘mintettes’ had been stolen from Ben Laurie until I saw his name in the acknowledgements