Yahoo Finance Fed Reserve Analysts Say Common Digital Currency Distinction ‘Problematic’
Financial experts at the New York Federal Reserve have taken a critical look the differences between a “common” distinction made between digital currency systems.
In a Wednesday Fed blog post, economists Rod Garratt and Michael Lee, analyst Brendan Malone and research exec Antoine Martin outlined the characteristics of “account-based” and “token-based” digital currency systems.
According to the post, an account-based system requires verification of the identity of a payer, while a token-based system needs to verify if the “object” (i.e., token) used to pay is valid or not.
The trouble, they write, is that some cryptocurrencies possess characteristics of both.
In fact, the classification method is “problematic” because the systems are not mutually exclusive and can’t be broken down to provide “a taxonomic hierarchy of digital payment methods.”
The authors cite bitcoin as a prime example of a payment method possessing characteristics of both systems.
Due to the way cryptocurrencies like bitcoin are constructed, the account-based system for digital currencies can be applied because of the nature of private keys and the alphanumeric string of numbers and letters that make up a bitcoin address.
That is, their identity is verified using the private key and address.
Yet, when a person wants to spend her bitcoin, the protocol verifies the payment’s validity by tracking its transaction history, making the crypto a fit for the token-based method.
The authors note the difference among bitcoin, dollar bills and gold coins is whether a recipient of a payment can ascertain the validity of the payment unit with “reasonably high confidence.”
While dollar bills contain security features making them hard to counterfeit, a crypto user cannot “independently” ascertain if their tokens are valid, they write.
It’s worth noting that blockchains like Bitcoin’s ensure the validity of transactions with multiple confirmations from miners using powerful computing hardware, removing the need for independent verification of each unit.
In conclusion, the authors argue, the distinctions between the two classifications have limited value.
And while such classification systems can be a useful tool in organizing and communicating concepts, in this case they could impede understanding of the growing digital currency technology space.
“Perhaps these terms should be retired to avoid further confusion,” they write.
See also: Federal Reserve Is Rushing to Get Its Instant Payments Offering Ready
