Bitcoin innovator Colu looks to connect blockchains for central bank cryptocurrencies

Colu, the coloured coins protocol innovator, is focusing on the ways and means of issuing central bank cryptocurrency, having raised some $9.6m (£6.6m) in funding for the project.

The Series A round, backed by Aleph, Spark Capital, Digital Currency Group and former Thomson Reuters CEO Tom Glocer, follows a $2.5m seed round back in 2015.

Colu's efforts have been buoyed by the recent Barbados central bank cryptocurrency experiment in which it took part with Bitcoin startup, Bitt.

Colu CEO Amos Meiri told IBTimesUK: "What people want is a local currency. We realised there is a real need for a new form of currency. We started working with different cities around the world together with a new strategic investor. But we can't disclose his name – a leader in the world of currencies."

There has been quite a lot of interest in the idea of central banks issuing some kind of cryptocurrency, and some bold moves in this area are being driven by the likes of eBay's Pierre Omidyar and his philanthropic investment vehicle the Omidyar Network.

Colu has seen many use cases being built on top of its platform, which denotes assets with watermarked bitcoin, including stocks, real estate and music.

Meiri said that the central bank currency use case involves real scale and a solution which requires more than just the Bitcoin blockchain. "We started with coloured coins; assets on top of the Bitcoin blockchain. While it's great for certain things, it's not great for assets that need millions of transactions. A digital version of cash is something that you need to transfer a lot every day, so we cannot work only with the Bitcoin blockchain.

This could involve some combination of Bitcoin and a private network. It could be also be some kind of super-fast, scalable payment channel, a relation of the proposed Lightning Network.

He said: "We are working with something that will basically connect the public blockchain, which for me is only Bitcoin, and private network that a central bank or a city would be able to run.

"We have developed something that I cannot say a lot about yet. We are going to have something published about it later on this year. But we connect basically between a private permissioned chain with the Bitcoin blockchain.

Meiri said this could impart the sort of security and immutability associated with Bitcoin, while having more freedom to add privacy and AML, KYC to the ledger that the country is going to run.

"If you start a network which is permissioned and the central bank knows all the players, but you use the transparency and the immutability of the Bitcoin blockchain, then we get into a very interesting point where you are gaining from both worlds.

"You have the private chain which is secure because it's a network, and let's say every now and then all the transactions are being hashed on Bitcoin blockchain."

Lots of people are talking about Lightning, which could be the great white hope of Bitcoin for the future. State channels can also help address privacy because only a portion of transactions are broadcast to the network. Meiri made it clear there are a number of different ways to approach this. He said Colu has been looking at some Lightning code and is also joining the Hyperledger Project pretty soon.

He said: "We actually took a lot of open source that exists and we found an interesting way to connect and have something that's actually working. The biggest problem in this field is that there's a lot of talk about different things but when you start to look at the code, a lot of it doesn't work yet.

"But there is so many smart people you don't need to invent everything. Building the whole stack from the lower level to the application level is very difficult and we decided to focus more on the application level.

"So, for example, we offer the wallet which is where you store your currencies, and of course you can send them easily for free. You can explore the merchants around you that accepting this as local currency.

"Basically a wallet is a platform, and we have also developed a merchant service where a merchant can easily accept the currency and also exchange it back to the local currency itself.

"There is a control panel where you are managing the economies. So this is the kind of a dashboard for either a municipality or the government or whoever wants to manage the economy.

"Here you have lots of values like collecting real-time data of the economy; every economy that is going to use it, immediately they become stronger because they don't need to wait a quarter to understand GDP or other financial data. Everything is in real time and it's very easy to issue, distribute and manage everything," he said.