Since the development of Central Bank Digital Currency (Central Bank Digital Currency, CBDC) in 2015, the discussion has basically revolved around two main directions: token-based model and account-based model. There are supporters in both directions:
1) In a token-based system, CBDC is created as a token with a specific denomination, and transferring tokens from one party to another is like transferring banknotes from one person to another.
2) In an account-based system, central banks, commercial banks, and other financial institutions need to keep account information for all users of CBDC, which means managing many accounts.
Discussions about these two directions are ongoing. E.g:
- Bank for International Settlement (BIS) insists on using the account model;
- The American private digital dollar (Digital Dollar) plan insists on using the Token model;
- Citibank believes that the Token model is better, and insists that digital currency can only take the Token route in Digital Currency 2.0 ;
- The Fed believes that these two models have their own merits.
This article discusses this issue with 3 articles by foreign scholars:
- The first article is the views of British financial technology company SETL, which has been doing research in the field of digital currency for a long time, especially in transaction settlement. The article believes that some open discussions have misunderstandings (see Section 2).
- The author of the second article is a former Federal Reserve scholar. He believes that the current public discussion has no basis. The current digital token system has both Token and account attributes. It is difficult to say whether the system is based on Token or account. (See Section 3).
- The author of the third paper is a Federal Reserve scholar, they agree with the second author’s point of view, but the wording is more intense . They believe that these discussion articles come from two different academic fields in the computer field and the central bank field, and there are academic barriers, and discussions often lead to the phenomenon of talking with ducks. For example, even if the same nouns are used, their representative meanings are different. Fed scholars also pointed out that the account-based and Token-based views that the central bank often mentions are based on a paper that was published earlier than the digital currency period and did not consider the classification of digital currency at all. However, central bank scholars have repeatedly cited the classification of the paper to distinguish digital currencies, which is not rigorous enough. At the same time, the professional names often used in the computer industry may have different interpretations in the banking industry (see Section 4).
In the past, some people said that digital currency is not a matter of science and technology, nor is it a financial issue, but a question of “faith”. Here we do not discuss the issue of faith, but discuss truthfully what is a digital currency. From the above three articles, it can be seen that even though the digital currency war has broken out, what is a “digital currency” has not yet been finalized. The emergence of digital currency has already shocked many central banks such as the Federal Reserve. What is a digital currency is a serious question.
In the two parties’ views, one is from the perspective of protecting personal privacy, and the other is from the insistence of the central bank’s responsibility to implement supervision. Through continuous discussions in academic and media public opinion, we can finally get a plan that is acceptable to both parties. Although there are still opinions that have not been clarified, it is still too early to discuss what a digital currency is, but there will be many new ideas and theories to explain this problem in the future.
Digital currency discussions will not only focus on the conflict of “privacy vs. regulation”. In fact, the social governance concepts of these two models are different, and the digital currency system design, regulatory technology, and clearing and settlement will also be different. If the routes of these two models continue to develop, completely different CBDC models, different financial market models, different compliance and underground economies will be produced. British scholars believe that CBDC will change the entire national economic system, and different CBDC models will inevitably produce different economic ecology and lifestyles. We predict that this issue will continue to be discussed. Today’s hot topic may not be a problem at all in the future; but now that it is not considered a problem topic, it may be a hot topic of controversy in the future.
When we were writing the book “Smart Contracts: Reconstructing Social Contracts”, we found that a point raised by the British Law Society when studying smart contracts in 2019 is worthy of everyone’s attention. They believe that digital assets are not real assets, but only represent the ownership of assets. For example, digital real estate is not real real estate, but a digital certificate of real estate ownership. Digital currency is a type of digital asset. If other digital assets are not real assets, then digital currency is not real currency, let alone digital cash. If you start from this perspective, you will come to a completely different digital currency system design and usage scenario. This will mean that there are at least 3 digital currency models:
- Token-based digital currency;
- Account-based digital currency;
- Voucher-based digital currency.
In the credential-based model, the loss of the key of the credential only means that a process needs to be reopened to apply for the asset credential, which will not cause the loss of assets. This fundamentally solves a key problem of digital currencies today: the loss of private keys represents the loss of assets. Certificate-based digital currency is no longer a valuable “digital asset”, but a “digital certificate” of valuable asset. Digital currency is just a certificate, not an asset, which is different from traditional digital currency thinking. According to the traditional view, both token-based and account-based digital currencies are classified as “digital assets”.
This design also brings new ideas. In addition to the key loss problem can be solved once and for all, the supervision method has also changed. Supervisors can control the funds stored in financial institutions. If money laundering is discovered, they can refrain from lending money, or even remotely cancel the legality of the relevant digital currency to stop it from continuing to circulate.
In addition, digital stablecoins or CBDCs may not have to adopt only one method, and may appear in multiple ways at the same time. Just like now the funds are allowed to appear simultaneously in the form of cash, bank deposits, checks, or prepaid cards. In the future, multiple digital currency methods may appear at the same time, coexisting with traditional currencies.
The British Law Society only proposed the name of the certificate, but did not propose a specific implementation plan and system design plan. We will propose our design plan and theory on digital certificates in the next article.
2. Views of the British financial technology company SETL
SETL is a British company dedicated to building blockchain-based solutions for financial markets, asset management and payment. It was the first to devote itself to the research of digital currency. The company’s chief engineer Anthony Culigan criticized and discussed the Consensys white paper. He raised the Consensys white paper “Central Banks and the Future of Digital Money” (Central Banks and the Future of Digital Money)  There are many problems.
Here first introduce some of the content related to the Consensys white paper:
An important design decision is whether the system is based on tokens or based on accounts.
In a token-based system, CBDC is created as a token with a specific denomination. Transferring tokens from one party to the other does not require coordination of the two databases, but transfers ownership in real time, just like transferring banknotes from one person to another.
In an account-based system, the central bank will hold accounts for CBDC users. In this approach, central banks must hold accounts for all users of the currency, which means managing more accounts.
We recommend a token-based system for a variety of reasons. It will free the central bank from the responsibility of large-scale account custody and reconciliation, as well as the reputation risks that follow in the event of problems or poor service quality.
The chief engineer of SETL holds a different view on the above ideas. First, he pointed out that the company’s own use Consensys Ethernet Square account system, rather than square Ethernet Token system. According to the Ethereum white paper, Ethereum is the account system (the following is the content of the Ethereum white paper):
In Ethereum, state is composed of objects called “accounts”. Each account has 20 byte addresses. State transition is the direct transfer of value and information between accounts. An Ethereum account consists of four parts:
1) A random number, a counter used to ensure that each transaction can only be processed once;
2) The current Ether balance of the account;
3) The contract code of the account (if any);
4) The storage space of the account (empty by default).
Since Consensys uses the account system itself, there is no reason or excuse to criticize other teams for using the account model. While screaming to strongly support the Token-based team, he uses account-based digital currency instead. According to the white paper, he also put forward 5 points to refute:
1) He believes that all currencies, including digital currencies, have specific denominations. Therefore, the Consensys white paper says that “CBDC is created as a token with a specific denomination” does not make sense. All currencies, whether CBDC or traditional currencies, have a unit size (for example, one cent or one dollar) that can be transferred among them. This has nothing to do with the design of currency and the use of token systems or account systems.
2) Account-based systems, such as Ethereum, do not have “two databases” and do not need to be coordinated.
3) He believes that the Consensys white paper does not explain why the token-based system is faster than the ledger-based system. In fact, the transaction speed of Ethereum exceeds that of Bitcoin . The opinion of the author of Consensys does not match the facts.
4) The account-based CBDC mentioned in the white paper requires the central bank to manage a large number of user accounts. But now the central bank system already operates like this.
5) The white paper says that if the central bank uses the account system, it will cause the central bank to have reputational risks. But now all central banks in the world use account-based systems. If you follow this logic, they all have reputational risks, including the Bank for International Settlements. And the central bank that uses the Token system has no reputational risk? The story of some countries issuing Token-based digital currencies but failing is an obvious counterexample (the price of some such digital currencies has returned to zero).
He also believes that the advantage of CBDC is that people can transfer value in digital form. In some digital currency systems, there is no need to prove the identity of the user or pass through a third party institution (such as a bank). The value of digital currency is that the user does not need to record the identity of the user, but requires the user to be able to operate some mobile phone or computer operations, such as entering a digital password.
3. Views of former Federal Reserve scholars at the University of California
An English paper “Token or Account-Based? A Digital Currency can be both”. The author is Rod Garratt, a professor at the University of California and a former Federal Reserve scholar. The author believes that the difference between an account-based system and a token-based system:
- Account-based systems need to verify the identity of the payer;
- The token-based system needs to verify the validity of the object used for payment.
The token-based digital currency model is sought after by some people because the digital currency or stable currency under this model has strong anonymity, just like handing paper currency from one person to another, and the ownership depends on the actual situation. Possession and change. Paper money and coins are such unregistered tools. One person can irreversibly transfer control of a thing to another person. Both parties do not need to prove their own identity, nor do they need any third party to prove their credibility and identity. Therefore, under the token-based digital currency model, users have a higher degree of freedom and privacy, but at the same time it will bring difficulties to supervision.
The author stated that many digital tokens can actually be counted as account-based systems, but they can also be counted as token-based systems, such as Bitcoin (traditionally, Bitcoin is a token-based system).
- Bitcoin is an account-based system: the account is a “bitcoin address”, and the private key is the proof of identity required for transactions from the account. Every time a Bitcoin user wants to spend Bitcoin, the user must verify his identity with a private key. What is important is that users must follow the process of the system to verify their established identities within the system.
- Bitcoin is a token-based system: When someone wants to spend Bitcoin, the protocol verifies its validity by tracking its history. The current event history is used to verify the validity of the “object” being transferred (for example, UTXO in Bitcoin), and the object is only valid when it has not been used. Therefore, Bitcoin is like cash. Most people cannot identify real and fake Bitcoins, although real and fake cash are sometimes not easy to identify.
The author got the above two completely different conclusions because they can explain what an account is from different points of view. When the definition changes, the interpretation is also different.
Rod Garratt’s view is correct. The early white papers of Bitcoin and Ethereum didn’t make it clear what Token is? What is an account? Even Bitcoin, which is recognized as a Token-based system, can also be interpreted as an account-based system. Since Bitcoin is a “one-time account”, it is an account system in this way.
Moreover, due to the recent rapid development of US regulatory technology, the previous view that Token-based digital currency has better privacy has been overturned. Because the largest dark web in the United States does not accept Bitcoin. In the eyes of US regulatory technology companies, most Bitcoin transactions can be tracked without the right to privacy. On the contrary, because of the use of Bitcoin, the participants were suspected of money laundering by the supervisory unit, so they were supervised throughout the process.
The United States has listed some exchanges as 100% money laundering institutions (that is, every transaction is laundering money). Any user buying or selling digital tokens on these exchanges will be deemed to be involved in money laundering by US regulators. In June 2021, the US FBI found the Bitcoin ransom in a very short time, and it was sending an important message: stop imagining that Bitcoin can be used to launder money.
The book “Interlink Network: The Way to Connect in the Future” puts forward a concept: if digital currency is completely based on the Token system, it may be more regulated. The US regulatory agency proposed the TRISA system, and we also proposed the STRISA system. These systems are the nemesis of money laundering. Regardless of whether it is based on a token or an account system, it can be supervised.
4. Views of Federal Reserve Scholars
In the article “Tokens and Accounts in the Context of Digital Currencies” (Tokens and Accounts in the Context of Digital Currencies), scholars from the Federal Reserve took Ethereum as an example to discuss the token and account model. First of all, the author stated that there are different views on the use of tokens in the computer world and the financial world.
4.1. Views from the computer world
Ethereum has smart contracts, and its early use cases are the programmatic definition of assets (or their representations) on the blockchain. The Ethereum community refers to these assets as “tokens.” The general idea is that smart contracts can define their own accounts to track the balance of user tokens and allow users to trade with the tokens. Given the flexibility of smart contract programming on Ethereum, there are many ways to implement such a system. Therefore, in order to ensure the consistency of token operations, a standard interface for replaceable tokens was proposed and adopted shortly after the launch of Ethereum. This standard is known by its proposal number ERC-20. Tokens issued by smart contracts that follow this standard are called ERC-20 tokens. The standard interface allows for various functions, including sending tokens from one address to another on the blockchain, delegating them to third parties as “perks”, and assigning them an identifier similar to a stock symbol.
The widespread adoption of the ERC-20 standard may help shape the concept of “cryptocurrency tokens” as custom assets issued on the blockchain through the use of smart contracts.
An important feature of Ethereum is electronic records. Unlike Bitcoin, which uses a format called “unused transaction output” (also known as UTXO) to process record keeping, Ethereum records information through account addresses. These account addresses are conceptually similar to user accounts in traditional finance. However, in Ethereum, the token balance on any ERC-20 account is scattered among the network nodes participating in the calculation.
The software that controls the user balance of these tokens is called a digital wallet, but this type of wallet does not contain any valuable assets and only stores private keys. As long as you have the private key, you can authorize the transaction of digital tokens on the blockchain platform, just like signing a check can activate the value of the check. With the private key, you can view or control the digital tokens on the Ethereum network. However, digital tokens only exist on the blockchain network and exist in the form of account balances, and are not stored in the “wallet”.
- Ethereum: only exists on the Ethereum network;
- Digital wallet: a system for storing the private key of Ether (it can be a hardware or software wallet);
- Private key: With this private key, you own the ether on the network, including the transfer of ether.
Once you have the private key, you can control the tokens on the network, and you can also transfer the control of these tokens to others. The sender and receiver of the token do not need to establish a relationship with the token issuer, they only need an Ethereum address and control the private key. The sender submits a message to the Ethereum network through an encrypted signature to initiate transmission. The message will deduct tokens from its balance and add the tokens to the recipient’s account balance. After the sender uses his private key to authorize the redistribution of control of a certain amount of tokens to others, the recipient can use his private key to transfer tokens from his account balance in the same way.
4.2. Views from the financial world
In 2009, Kahn and Roberds wrote a seminal paper on payment economics, establishing the difference between an “account-based” payment system and a “store of value” payment system. In their description, the essence of the dichotomy comes down to the type of verification required by each system: identity verification is the core of the account system, and anti-counterfeiting protection is the core of the value storage system. This shows that identity verification is the essential difference between account-based payment systems (such as bank deposits) and value store payment systems (such as cash). In this way, the traditional token system can be classified as a value storage system. However, this article does not discuss digital currency at all. Whether the conclusion of this article fits the category of digital currency can be further discussed, but it may be a bit early to arbitrarily distinguish digital currency into these two forms.
The author of the Federal Reserve article believes that it is not meaningful to strictly distinguish between the two types of payment systems:
- Not all accounts rely on authentication. For example, accessing certain bank accounts may involve learning a piece of secret information, rather than verifying identity.
- Second, currencies in the form of “digital objects” raise major questions about technical feasibility, security, and privacy.
- Furthermore, digital tokens are essentially just pieces of information about cryptocurrencies and the central bank. Historically, tokens only represent tangible assets of value. However, the current tokenization can represent the digitization of any valuable asset, such as cash and securities. For example, the issuance of digital stocks or digital real estate through the blockchain system. And these digital assets, leaving their issuance environment, whether they still have a value similar to cash is worth thinking about. (Note: For example, the flood in Henan in 2021. At that time, there was no Internet in the area, and Alipay could not be used, but cash could still be used. Alipay would lose its value if it leaves its specific environment (Internet).)
They believe that many CBDC research reports focus on concepts, monetary policy, or technical issues. But discussing monetary policy needs to consider whether technology is feasible at the same time. If the technology is not feasible, or if there are other technologies that have a way to bypass the policy, monetary policy has no value. Any digital currency discussion needs to consider monetary policy and technical feasibility at the same time, so as to avoid not even clarifying what digital currency is, what it can and cannot do.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/digital-currency-or-digital-certificate-part-1-what-is-digital-currency-anyway/
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