Challenges of Deploying a Virtual Currency like Bitcoin

American non-profit global policy think tank RAND Corporation has published an extensive research paper entitled “National Security Implications of Virtual Currency,” to examine the feasibility for non-state actors to increase their political power by deploying a virtual currency like bitcoin.

The research addressed three main points:

  1. Why would a non-state actor (an organization with significant political influence) deploy a virtual currency? What challenges will it have to overcome?
  2. How might a government technologically disrupt a VC deployment?
  3. The purposes of deployment and development of virtual currency broader than currency

An increasing number of banks participating in the R3 consortium, government agencies and central banks are looking into the possibility of deploying their own independent virtual currencies to replace fiat money. However, RAND Corporation explains just why it isn’t as easy as it sounds.

Creating and developing a virtual currency requires a certain level of technological sophistication and infrastructure. Maintenance and deployment of virtual currency requires competencies in networking, computation and cryptographic techniques. The complex mathematical algorithms used to encrypt these currencies are difficult to embrace.

Another challenge is ensuring levels of transaction anonymity demanded by users so that buyers and sellers are assured of proper exchange. One advantage virtual currency could have against fiat money is transaction anonymity: by distorting and mixing the pathway and origins of the transactions, it is possible to generate untraceable transactions. Such feature would allow users to gain unprecedented levels of financial privacy.

“Without sufficient user anonymity, everyday users will be strongly deterred from using any VC for everyday economic transactions due to potential serious privacy breaches. Note that “anonymity” is a broad concept, and attacks to deanonymize range from highly sophisticated attacks to de-anonymize a single user to hacker attacks in which little effort and sophistication is required to de-anonymize broad groups of individuals,” noted the paper.

The authors of the research further explained that appcoins being developed by financial institutions worldwide is not different from virtual currencies in existence like bitcoin. Therefore, the deployment of private and controlled blockchain networks are just as challenging as developing a new independent virtual currency.

“While many Appcoins can be used as currencies and are useful for various types of financial transactions, they create and rely on a more complex infrastructure and do not differ greatly from other VCs,” read the research paper.

To examine the technological capability of virtual currencies and methods of implementing decentralized technologies like the blockchain technology, banks and government agencies are beginning to set up innovation labs and research groups to explore the technologies behind prominent currencies like Bitcoin.

Over the next few years, government agencies and central banks may attempt to replace fiat with cryptocurrencies to implement negative interest rates. If that shall happen, RAND researchers explain that non-state actor must maintain a healthy relationship with the nation-state to receive cyber-help.

“A sophisticated nation-state is the most capable actor to ensure this security, which is another reason why a VC has the greatest chance for cyber survival when a non-state actor is supported by a nation-state that possesses cyber sophistication. At the very least, the level of sophistication and investment to success- fully attack a VC would be raised, making any opponent’s decision calculus to attack a VC more complicated,” read a portion of the research.

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