The Fed thought it had all worked out when it came to digital currency. There are “account-based” digital currencies, where systems verify accounts (such as bank transfers) and “currency-based” systems, where suppliers verify currencies, such as dollar bills or Fortnite’s V-Bucks.
Then Bitcoin came along and mumbled everything up, economists from the Federal Reserve Bank of New York complained yesterday in a blog post.
Bitcoin and the hundreds of other cryptocurrencies that use public key cryptography form both an account-based system and a token-based system. This is “problematic,” grumbled Fed economists.
First, Bitcoin is an account-based system. “The account is a Bitcoin address, and the private key is the proof of identity required for transaction of that account. Every time a Bitcoin user wants to spend Bitcoin, that user has to verify his identity with the help of his private key. “This is just like bank transfers, which rely on the bank’s ability to verify the identity of the account holder.
Second, it is also a token-based system: “If someone wants to spend Bitcoin, the protocol verifies its validity by tracing its history. The current transaction history is used to verify the validity of the ‘object’ being transferred. ‘Just like cash, which “is only valid if it is actually issued by the central bank.” Or like Fortnite’s V-Bucks, released by the game’s publisher, Epic Games.
The thoughts of the Fed, when they realized this, blew up. The difference is many times went up when discussing how to create a state-owned digital currency, also known as a central bank digital currency like CBDC. But Bitcoin proves that two seemingly contradictory ideas can be true at the same time; the rules that led to those conversations have been broken. Kaput.
“If a digital currency can be both token- and account-based, the classification loses its power to meaningfully distinguish between new and existing methods of digital payments,” they said.
They argued that adhering to the distinction “can slow down” the understanding of various digital payment technologies. In a huff, they concluded: “Perhaps these conditions should be withdrawn to prevent further confusion.”
