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August 12, 2020

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In reply to Svein Olnes: Thanks for your interest. We’re aware of Lewis’s post and his different take on the relative confidence a payee can have for determining the validity of a dollar bill versus a digital currency. As we tried to explain in our post, and others have observed as well, dollars have readily identifiable and well-known security features that allow holders to establish them as authentic in the moment, while a digital currency must be verified through a third-party.

Thanks for an interesting blog post where you try to clarify concepts that are a bit ambiguous. Whether you succeed or not I will not try to judge, but I will point to your paragraph on how to ascertain the validity of a dollar coin/bill or a bitcoin payment. I think your argument here is wrong, and I will point to Antony Lewis’ comments in his own blog “Bits on Blocks” for a clarification.

Thanks for this post and the examples, they really help to understand the distinction between token-based and account-based systems. Very valuable information for beginners.

Dear Sirs, The cases of Hong Kong’s Octopus and Japan’s Suica e-money system reinforces your point that the token based and account-based digital currencies are not mutually exclusive. The Octopus was the first contactless e-money system based on FeliCa Operating System which records which accounts the digital money has moved. (Wikipedia described South Korean UPass as the first contactless e-money system, but it is wrong. The UPass started as just an electronic contactless card system not e-money system.) The Suica e-money also record accounts. Both Octopus and Suica cards are regarded as token based as they are transferrable like notes and coins. In summary, i agree with your assessment that the distinction between token based and account based does not mean much if any.

Gabriele, thank you for your comment. We think of “identity” in a broad way. You are correct that it is possible to transact with Bitcoin while remaining anonymous. Nevertheless, to transact with Bitcoin any user must obtain a public-private key pair, which corresponds to that person’s identity within the system. Regarding your second point, whether a currency can be counterfeit is only one aspect of what makes it secure. There are many well documented cases of people losing their Bitcoins because they were not able to keep their private key secret.

Jessica, thank you for your comment. As you note, it is common in central bank and academic circles to use the term ‘digital currency’ for any system that allows for electronic payments, include Fedwire. This is also the way we think of digital currency in this blog post. Our main point also holds for the more narrow definition you prefer, as the example of Bitcoin should make clear.

How do you define digital currency? That seems to be the main question for where I start to see a disconnect between what I’ve read in the crypto space and what I’ve seen in the Fed/IMF/BIS world. Based on the crypto space, my current understanding for a simple definition of digital currency is “programmable money”, meaning it is tokenized and it’s a digital bearer instrument. To me, it’s not a question of whether money is token- or account-based, it’s really a question of whether or not it’s a token to determine if it’s a digital currency. Fedwire, while there is a digital aspect, is not a system for transferring a digital currency. It’s a transfer of messages back and forth between some intermediaries to update their ledger or record of accounts. A ‘general purpose account’ provided by a central bank would also not be considered a digital currency if it’s just having access to an account with no programmable money. This seems at odds with what I’ve read from the Fed or BIS, where the term ‘digital currency’ is used more loosely, so that something like inter-bank transfers and reserve balances would fall under the ‘digital currency’ categorization.

Bitcoin IS NOT an account based currency because no identity is necessary and the right to spend is NOT guaranted by any institution. The conditions to spend the funds are set by the spender and the protocol and can perfectly be met by a machine (not the same in an account based system traditionally intended). Bitcoin is the least counterfeitable currency to date because its validity is redundantly verified by thousands of computers which act as anti counterfeiting machines.

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