RAND report: Challenges of issuing virtual currencies like Bitcoin

The RAND Corporation, an American nonprofit organization and global policy think tank, published a research report titled "The Impact of Virtual Currency on National Security" to examine the feasibility of non-state organizations increasing their political power by issuing virtual currencies such as Bitcoin.

The main contents of the research report are as follows:

1. Why would a non-state organization (one with significant political influence) issue a virtual currency? What challenges would it need to overcome?

2. How might the government technically disrupt the issuance of virtual currencies?

3. After the issuance and development of virtual currency, its use will be more extensive than legal currency

More and more banks, including R3, government agencies and central banks, are investigating the possibility of issuing their own independent virtual currencies to replace legal tender. However, the RAND Corporation explains why this is not as easy as it sounds.

Creating and developing virtual currencies requires a certain level of advanced technology and infrastructure. Maintaining and issuing virtual currencies requires the support of network, computing and encryption technologies. In addition, it is also very difficult to embrace the complex mathematical algorithms used to encrypt these currencies.

Another challenge is to ensure the level of transaction anonymity required by users, so as to ensure that a fair transaction is reached between buyers and sellers. One advantage that virtual currencies can have over legal tender is the anonymity of their transactions: by distorting and mixing the source and path of transactions, it is possible to generate transactions that are difficult to trace. This feature of virtual currencies can enable users to enjoy an unprecedented high level of financial privacy.

“Without adequate transaction anonymity, users are deterred from using virtual currencies for everyday economic transactions due to the potential for serious privacy violations,” the study explains. “Note that the concept of ‘anonymity’ is broad, and attacks to authenticate an individual user range from highly sophisticated attacks to hacks that authenticate large groups of individuals with little effort or complexity.”

The authors of the study further explained that appcoins developed through global financial institutions are not that different from existing virtual currencies like Bitcoin. Therefore, the challenges of configuring a private and controlled blockchain network are as great as those of developing a new independent virtual currency.

“Many appcoins are used as circulating currencies and are useful for facilitating a variety of financial transaction types, creating and relying on a more complex infrastructure that is not much different from other virtual currencies,” the study continued.

In order to validate the state of the art in virtual currencies and how to implement decentralized technologies like blockchain, banks and government agencies have set up innovation labs and research groups to explore the technology behind major currencies like Bitcoin.

In the coming years, government agencies and central banks may try to replace current fiat currencies with cryptocurrencies in order to implement negative interest rate policies. If this happens, RAND researchers explained that non-state organizations must maintain a healthy relationship with state organizations to gain support on the network.

“Experienced nation-state actors are best placed to ensure this security, which is another reason why cryptocurrencies stand the best chance of surviving when a nation-state with an advanced network supports a non-state actor,” the study said in part. “At the very least, it raises the bar on its technology and the likelihood of successful investment, making it more difficult for adversaries to attack cryptocurrencies using decision algorithms.”